Six Figure Investor

There is a healthy sign in the marketplace right now: companies are issuing new stock offerings. In the case of our Income Portfolio two of our holdings have issues new offerings: Realty Income (O) and Enterprise Products Partners (EPD).

Why would a company do this? The primary reasons are:

• The stock price is high enough such that implied return to new investors is low. In the case of issuing common share or units, this is effectively the dividend yield. In both cases mentioned above it’s about 5%.
• The company believes that it can adequately garner a sufficient return by using the money investing in their business. A high stock price makes this cost of capital lower. In the cases of Realty and Enterprise, their stock prices are near all time highs.
• Because they can. One never knows how the markets will behave going forward, so it’s always good to get extra resources when times are good.

The inital reaction by the markets to these announcements is what’s called a ‘fear of dilution’, so the stocks normally trade down. More shares for the same amount of earnings effectively makes the earnings per share go down. However, over time, the extra capital should enhance earnings for all shareholders if the company is doing its job.

In this case of Realty and Enterprise, they have a long history of using their capital effectively so there is no cause for alarm.