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How to Best Account for Dilution in Investment Analysis?


What is the best method to evaluate how much of a company's earnings or free cash flow growth you are being allowed to capture due to dilution?   Some companies that need to raise cash for expansion constantly issue new shares, so you don't really capture the full growth of the company.   If the company grows earnings by 25% and dilutes shareholders by 10% to fund that growth, doing a simple comparison of - for example - the PE ratio and the earnings growth rate is going to give a misleading result.   

I am guessing that what we should do is look at the growth of earnings per share, free cash per share, and in the case of an REIT at Adjusted Funds from Operations per share?

Raise your hurdle rate to a point where minor dilution is an afterthought=buy it cheaper. If there's major dilution... that's a red flag... and buy it even cheaper.


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