Companies can also dilute shares. Sometimes a company needs to finance a large acquisition. Or maybe the company needs more money for various reasons to operate. Diluting shares is bad for investors unless the money spent is able to add more to the earnings relative to how much dilution occurs. Usually debt heavy industries such as real estate and utilties dilute shares to fund expansion. With each new share sold on the open market, the amount of dividend dollars a company needs to pay increases. Every new share needs to be paid the dividend making the dividend burden even bigger.
I get my share data from Morningstar. I look at a 5 year window up to 2016 and just divide the percentage decline or increase over that 5 year period to get a rough estimate of how much the company on average changes the number of shares.
The example above shows Illinois Tool Works (ITW). In my portfolio this company has been the best at reducing share count over a 5 year window and they are also a very well performing dividend aristocrat with rising earnings per share. The share count at the end of 2016 was 357M and it was only 495M 5 years earlier. This is a very impressive decrease of 5.5-6% a year.
I did this investigation for all of my holdings. I noticed that a lot of my best portfolio performers have very nice share count decreases. These include ITW, Home Depot (HD), Visa (V), MasterCard (MA), Ross Stores (ROST), and 3M (MMM). Most of my normal "C" Corps have made an attempt to reduce or at least keep the number of shares flat. Keep in mind companies do pay their execs and employees stock for bonuses and incentives. Companies have to keep buying these stock back in order to avoid diluting the share base.
Name | Ticker | Sector | ShareCnt5yr |
Illinois Tool Works Inc. | ITW | Industrial | -6% |
Home Depot Inc | HD | Discret | -4% |
McDonald's Corporation | MCD | Discret | -4% |
Visa Inc | V | Financial | -3% |
Mastercard Inc | MA | Financial | -3% |
Ross Stores Inc | ROST | Discret | -3% |
3M Co | MMM | Industrial | -3% |
TJX Companies Inc | TJX | Discret | -3% |
Bard (C.R.) Inc | BCR | Health | -3% |
Philip Morris International Inc | PM | Staples | -2% |
PepsiCo | PEP | Staples | -2% |
General Mills, Inc. | GIS | Staples | -2% |
Kimberly-Clark | KMB | Staples | -2% |
Automatic Data Proc, Inc | ADP | Tech | -2% |
Church & Dwight | CHD | Staples | -2% |
Colgate-Palmolive Co | CL | Staples | -2% |
Altria Group Inc | MO | Staples | -1% |
McCormick & Company | MKC | Staples | -1% |
Procter & Gamble Co | PG | Staples | -1% |
The Coca-Cola Co | KO | Staples | -1% |
Stryker Corporation | SYK | Health | -1% |
Abbott Laboratories | ABT | Health | -1% |
Johnson & Johnson | JNJ | Health | 0% |
Becton Dickinson and Co | BDX | Health | 0% |
Starbucks Corporation | SBUX | Discret | 0% |
Clorox Co | CLX | Staples | 0% |
Hormel Foods Corporation | HRL | Staples | 0% |
Air Products & Chemicals, Inc | APD | Materials | 0% |
AT&T Inc | T | Telecom | 1% |
Xcel Energy Inc | XEL | Utilities | 1% |
Dominion Resources, Inc | D | Utilities | 1% |
The J. M. Smucker Company | SJM | Staples | 1% |
Aqua America Inc | WTR | Utilities | 1% |
NextEra Energy Inc | NEE | Utilities | 2% |
Southern Co | SO | Utilities | 2% |
Federal Realty Investment Trust | FRT | REIT | 3% |
WEC Energy Group, Inc. | WEC | Utilities | 7% |
Realty Income Corp | O | REIT | 40% |
Kraft Heinz Co | KHC | Staples | N/A |
Medtronic plc | MDT | Health | N/A |
Some companies are the product of mergers and acquisitions so I was not able to really get a good idea of share count growth or decline. The Utilties and REIT space are the worst sectors in terms of minimizing share count. I don't own any MLPs but MLPs also operate similarly. Realty Income (O) has increased the number of shares drastically from 126M in 2011 to 256M in 2016. This is basically a doubling of the number of shares in just 5 years. REITs need to make public offerings to acquire cash for purchasing additional properties. REITs pay the large majority of their earnings back to the share holders, which means they cannot keep a lot of the money they earn. Diluting the share base is the way they can fund their expansion. If the expansion purchases add more to the bottom line compared to the dilution of shares, then the overall company performance will continue increasing. This can be seen in well managed REITs like FRT and O. However, the dilution of shares still concerns me which is why I do not have a super large position in REITs.
Although share buybacks are important. It is not the panacea for increasing company earnings per share. I would rather see executives invest in the company organically instead of financially engineering the company's earning statistics. Buying back stock can only work so much but one must innovate and keep up with the competition by having good products and services. That requires investment back into the company and buying back shares is only a way to "cheat" in the short term. Additionally, companies oftentimes buy shares back at market highs since that is when the company is doing their best and spare cash is abundant. That money might have been better used in dividends or company reinvestment or acquisitions.
A very interesting look into the buyback scheme. Most of the time it is seen as a positive that the company can buy back some shares. But then they also have to be buying them back at the right price otherwise they are "wasting" money buying equity back at the wrong time. Cheers for sharing.
ReplyDeleteThanks a lot for the share, all of the info that you post is very helpful! Please keep doing what you are doing, and thanks for setting a standard for us smaller dividend guys :)
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