Lesson 9 of 12 · 2 min · Valuation

Buybacks and dilution, explained

Your slice can quietly grow or shrink.

1. Your slice of a company depends on how many shares exist. When a company issues new shares, every old slice gets a little smaller. That is dilution.

2. Say Lemon Co hands its staff 50,000 new shares every year. That is 5% more shares, so profit per share grows 5% slower than profit itself.

3. A buyback works the other way. With its $1.2 million of free cash, Lemon Co could buy back 40,000 of its own shares at $30. Every remaining share owns a little more.

4. But buybacks only create value when the shares are cheap. Buying back stock that is worth $20 for $30 destroys money, just more quietly than a bad acquisition.

5. So always check the share count over several years. Falling is usually good news. Rising steadily is a cost to you, even if profit looks great.