My wife is a math teacher. Why does View from the Street mention this? Because this column is about math.
Simply, numerators and denominators.
Basic math tells you the more shares you have outstanding (the denominator), the harder it is to have a per-share impact from a dollar's worth of earnings (the numerator). That said, one of the better strategies I have found for investing is to look for companies that have kept their share counts low. With a low share count, you have less dilution of earnings, more impact from positive news, and a better chance of investment success.
There are a few examples in Canada of companies that have never issued new shares after going public. There are examples of companies who continually buy back shares each year, and actually have fewer shares outstanding today than they did five years ago. Those examples will be presented in a future column. Today's piece is the opposite: companies with lots of shares outstanding.
I did a Bloomberg search of Canadian companies with more than 300 million shares outstanding. I have nothing against any of these companies, and in fact own one or two of them. However, by looking at the math involved, it is simply a fact that these companies will have a harder time boosting per-share income significantly, due to the sheer number of shares that have been issued during their history.
Nortel Networks Corp. would have come in near the top of the list, but its recent one-for-10 share consolidation puts it out of contention for the most shares outstanding.
Despite investors' negative views on share consolidations, in Nortel's case, it was probably a good thing, if for perception only: Without the consolidation, Nortel would have now had 4.4 billion shares outstanding (it now has 440 million post-consolidation). With the former share count, math tells us Nortel would need profit of $4.4-billion to earn $1 a share. Last time I checked, Nortel's profit wasn't quite in that range (it lost $957-million last year).
Another company that saved itself from appearance on the "most shares" list was Northern Financial Corp. (NFC/ TSX). According to Bloomberg, the company has 12.4 million shares outstanding. That's not too bad, until you consider the one-for-100 share consolidation it completed in November, 2005. Without that, there would have been 1.2 billion shares outstanding, and North-ern would have been close to the top of our list. To make $1 per share, Northern would have needed to earn $1.2-billion. Now, it needs just $12-million in earnings to make a buck a share. It reported nine-month earnings recently of $3-million or 31¢ a share.
Excluding the consolidation group, our most-shares list returns names like Bombardier Inc., with 1.4 billion shares outstanding, and ManulifeFinancial Corp., with 1.5 billion shares out, and Royal Bank, with 1.3 billion shares. Each of these needs to be given a bit of slack, however, given how long each company has been around and their history of issuing stock to pay for acquisitions.
Lesser-known companies, of course, have also been prolific share issuers. One example made some more news this week and will see a combined company that's much bigger but with a lower number of shares outstanding.
Peak Gold Ltd. (PIK/TSX) currently has 726 million shares outstanding, according to our screen. It had to issue a lot of shares to buy two gold mines: In April last year, it gave 155 million shares to Goldcorp Inc. in exchange for a mine, and issued 435 million more shares in a financing for another acquisition. It also issued 147 million more shares in a financing in November.
This week, it announced a three-way merger with two other companies, Metallica and New Gold. Due to the share-exchange ratio in the merger, the new company will have fewer than 300 million shares out.
Falcon Oil and Gas Ltd. (FO/TSX) has 566 million shares outstanding. It had a huge run a while ago as investors anticipated prolific gas finds in Hungary. The company issued 100 million shares in December, 2007, 43 million in July, 2006, and 69 million shares in March, 2006. While the stock is up 82% so far in 2008, it is down 82% on a 52-week basis.
A company with lots of shares outstanding that has done a bit better is Banker's Petroleum Ltd. (BMK/TSX).
It has 519 million shares outstanding, with its last issue of 66.6 million shares to our company and Blackrock Investment Management in March. That share issue was done at 90¢; the stock is now $1.70. Banker's shares have gained 94% this year and 196% on a 52-week basis.
Still in the oil and gas space, Pacific Rubiales Energy Corp. (PEG/TSX) has a whopping 1.7 billion shares outstanding. It issued almost half of its shares outstanding in last year's acquisition of Pacific Stratus Energy. My bet is that shareholders approve a consolidation sometime in the future to get the share count down.
So remember what you learned in high school: keep the denominator low. That way, your investments are mathematically skewed to perform better.
peter@sprott.com - Peter Hodson is a senior portfolio manager at Sprott Asset Management in Toronto.