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Share count: dilution and share buybacks

How to track the change in share count, measure dilution and the effect of share buybacks, where to find these figures in an annual report, usual thresholds and traps.

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Definition

The change in share count shows whether each shareholder’s stake in the company is growing or shrinking. An increase is dilution: the company has issued shares, to raise money, pay for an acquisition or pay its employees. A decrease usually comes from share buybacks, after which the company cancels the shares.

Formula

Average annual change = (average diluted share count of the last year / that of the first year) to the power of (1 / number of years) − 1

Where to find it in an annual report

The weighted average number of shares, basic and diluted, appears at the bottom of the income statement, next to earnings per share, or in the note on earnings per share. Share buybacks appear in the financing section of the cash flow statement, and the note on share capital details the shares issued, repurchased and cancelled.

Common thresholds

Long-term quality: a share count that is flat or falling over 5 years for green (0% or less), up to a 2% increase a year for orange. Reasonable growth, under the name of annual dilution: 2% at most for green, up to 5% for orange, because stock-based pay is more widespread there.

In the preset strategies

Preset strategy Criterion met To monitor Criterion not met
Long-term quality Annual change in share count (5 years) ≤ 0% 0% to 2% > 2%
Reasonable growth Annual dilution ≤ 2% 2% to 5% > 5%

Pitfalls

  • The diluted share count includes options and free shares still to come: it is more cautious than the basic count.
  • Buybacks may only offset the shares handed out to employees: the share count stays flat, but the cash has still gone out.
  • Repurchasing shares at a very high price destroys value for the remaining shareholders, even if EPS rises.
  • An acquisition paid for in shares increases the share count at once: check whether the profit it brings offsets the dilution.
  • A stock split multiplies the number of shares without changing anything: use adjusted figures.

Where it does not apply

  • Young companies that raise money regularly: dilution is part of how they are financed, so the criterion is read together with cash and growth.
  • Companies emerging from a financial restructuring, whose capital has been rebuilt: earlier years are no longer comparable.

A worked example

A fictitious company, called Company R here, had 100 million diluted shares five years ago and 95.1 million in the last financial year. Its average annual change is (95.1 / 100) to the power of (1 / 5) − 1, or about −1% a year: green for Long-term quality.

Share buybacks and dividends

Repurchasing its own shares is another way for a company to return money to shareholders. Instead of receiving a dividend, the shareholder sees their stake in the company grow. Buybacks make sense when the company has surplus cash and the share price is reasonable relative to its value. Funded with debt, or carried out at a peak in the share price, they weaken the company.

Dilution and earnings per share

If total profit rises by 10% and the share count by 4%, earnings per share rise by only about 6%. That is why EPS growth is measured per share.

Sources