Starbucks Options Plan Puts Dilution on Menu

When it comes to stock options, Starbucks (SBUX) is asking shareholders for one last refill.

The coffee chain wants to pour in millions of new shares into the cup of options that it can hand out to employees and managers. If approved by investors, the plan, which the company laid out in its proxy filed last week, would push options-related dilution at the company to greater than 19% of outstanding shares -- far above the level at which many institutional investors might be expected to balk.

By some measures, the plan would essentially double the company's options dilution, noted Kent Hughes, managing director of Egan-Jones Proxy Services, an advisory firm. "This just seems like it's excessive potential dilution," he said.

As might be expected, Starbucks' board argued that shareholders should approve the plan at the company's annual meeting on Feb. 9.

"The board has long believed that employee ownership in the company serves the best interest of all shareholders, by promoting a focus on long-term increase in shareholder value," the directors said in the proxy.

But investors could find themselves in a quandary about how to vote. On one hand, the company has been a top financial and stock performer -- the most important issue for the many growth investors who hold the stock.

On the other hand, its options practices seem to run against prevailing investor opinion on the issue -- and could pose both short-term and long-term problems for the company. As soon as Thursday, for instance, accounting regulators are expected to issue a rule that would require companies such as Starbucks to start recognizing the cost of options in their income statements next June, which could immediately hit the company's reported earnings.

According to a footnote in Starbucks' annual report, its earnings would have been 11.5% lower in its just-completed fiscal year if it had expensed options.