Dividend Ideas: Superior Returns From Shrinking Shares

My private testing shows that there is a link between how a firm manages their share pool and the future performance of the stock. One hypothesis is that when the potential for dilution drops, investors fail to fully price in this reduction of risk. Another hypothesis is that firms engaging in aggressive net buybacks do so when the company's forecast is optimistic. Investors may see the immediate impact of improved fundamentals on a per share basis, but they may not fully factor in the confidence management has in the near-term future of this stock.

Sometimes a company will buy back shares, coincidentally (cough, cough) when executive stock options are being exercised. The short-term boost of open market buybacks will create a nice upwards pressure to sell their shares into. This does little good for the common shareholder. But this practice may become less likely if both the common share count and the potential for dilution is on a downward trend. I realize that most will not run out and buy a portfolio of stocks based solely on the changing share count. It is, however, an interesting thought that investors may not fully realize the positive or negative implications when the share pool changes size. If that is true, it may be worth a quick look at historical share size before buying a new holding.

Source: Seeking Alpha

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