The Overlooked Indicator Outstanding SharesThe Overlooked Indicator: How Changes in Outstanding Shares Impact Long-Term Investments
When evaluating a company for long-term investment, most investors focus on familiar metrics such as revenue growth, earnings per share (EPS), and price-to-earnings (P/E) ratios. However, one crucial indicator often overlooked or misunderstood is the change in a company's outstanding shares over time. This variable plays a significant role in determining the market capitalization and, ultimately, the shareholder's stake in the company.
Understanding Outstanding Shares and Market Capitalization
Outstanding shares represent the total number of shares a company has issued and are held by all shareholders, including institutional investors, retail investors, and insiders. These shares are a key component in calculating a company’s market capitalization, which is simply:
Market Capitalization
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Outstanding Shares
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Share Price
Market Capitalization=Outstanding Shares×Share Price
While market capitalization is widely referenced, changes in outstanding shares are often neglected, even though they can significantly influence the per-share value of a company.
Issuing and Repurchasing Shares: A Tale of Two Strategies
Companies can increase or decrease the number of outstanding shares for various reasons:
Issuing New Shares: When companies issue additional shares, often to raise capital or fund growth initiatives, they dilute existing shareholders' ownership. This dilution can have a material impact on the value of each share, as the same company’s equity is now spread over a larger number of shares.
Share Buybacks: Conversely, when companies repurchase their own shares, they reduce the number of outstanding shares, effectively concentrating ownership among the remaining shareholders. This often boosts metrics like earnings per share (EPS), making the company appear more attractive to investors.
Case Study: Microsoft and MicroStrategy
To illustrate the impact of changes in outstanding shares, let’s examine two contrasting examples: Microsoft (MSFT) and MicroStrategy (MSTR).
Microsoft (MSFT): In 2020, Microsoft had 17.8 billion outstanding shares. By 2024, this number had been reduced to 15.2 billion—a 15% reduction. This significant buyback program demonstrates Microsoft’s commitment to returning value to shareholders. Reducing outstanding shares enhances per-share metrics and can indicate confidence in the company’s financial health and future.
MicroStrategy (MSTR): In stark contrast, MicroStrategy increased its outstanding shares from 100 million in 2020 to 197.2 million in 2024—a staggering 97% increase. This massive share issuance reflects a dilution of shareholder value. While the additional capital raised might have been used to fund growth or acquisitions, existing shareholders now own a smaller percentage of the company.
The accompanying charts vividly illustrate these trends, highlighting how these strategies can dramatically alter the ownership landscape over time.
Why This Matters for Long-Term Investors
As a long-term investor, it’s essential to look beyond surface-level metrics and consider how changes in outstanding shares affect your investment. For example:
Dilution Risk: A company that frequently issues new shares may struggle to generate sufficient internal capital, signaling potential financial challenges or aggressive expansion strategies that could dilute shareholder value.
Share Buybacks: While buybacks can enhance per-share metrics, they are not inherently positive. Investors should ensure the buybacks are funded by strong free cash flow rather than debt, which could jeopardize the company’s financial stability.
Impact on Valuation: Adjusting for changes in outstanding shares provides a more accurate picture of a company’s valuation and its ability to generate returns for shareholders.
Conclusion
Changes in outstanding shares are a critical but often overlooked factor in evaluating a company’s long-term potential. By understanding the implications of share issuance and buybacks, investors can make more informed decisions and avoid common pitfalls in their investment journey.
The examples of Microsoft and MicroStrategy serve as a reminder that not all changes in outstanding shares are created equal. For long-term investors, keeping an eye on this overlooked indicator can be the difference between a growing stake in a thriving company and an increasingly diluted piece of the pie.
