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Making Common Stock Shimmer


Banks, corporations find new ways to foist diluted shares onto others.

One of my all-time favorite Saturday Night Live skits appeared during the show's first season: Dan Aykroyd and the late Gilda Radner arguing about a new product called Shimmer, wherein they finally conclude "it is both a floor wax and a dessert topping."

I'm increasingly reminded of this skit in reading about the way common stock is being used for a broader and broader range of purposes. For example:

  • Honeywell (HON) issuing $1.2 billion in new shares to cover a shortfall in its pension plan.

  • Bank of Ireland (IRE) announcing that it may "pay" preferred stock dividends "in kind" using common stock.

  • Freeport-McMoran (FCX) raising $750 million in new common to pay down its bank lines.

  • Banks and brokerage firms paying 2008 executive bonuses in new common stock.

And I could go on.

As longtime Minyanville readers know, I believe there are only 2 times when corporations issue common stock: When they absolutely have to, or when it would be stupid for them not to.

Increasingly, though, I believe that "or" is becoming an "and," insofar as corporations -- both in need of new capital and unable to find new "voluntary" investors -- are finding new ways to foist increasingly diluted shares onto others.

In many cases, there are promises to buy back these new shares in good times ahead. But I'm afraid that some of these comments are pretty disingenuous – and based on hope, rather than certainty.

My point is this: As things worsen, and the necessary deleveraging of our economy takes place, I suspect we'll see greater and greater "involuntary" use of common stock. Some will be at the hands of banking regulators, but more and more will take place within the industrial sector, particularly as manufacturers look for ways to settle long-term liabilities.

But where credit was the currency of the 1990s and early 2000s, company stock will be the preferred (or should I say more common) payment source ahead. And in this regard, those believing they'll be on the receiving end of cash payments, may want to reforecast their incoming cash flows to reflect the fact that at least some portion may be in stock (and some of it with time/liquidity restrictions).

And needless to say, for those holding common shares, prepare for further dilution. Because, like SNL's Shimmer, common stock can and will be used in ways you never imagined.

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No positions in stocks mentioned.
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