Could it really be true that ice cream builds muscles? After all, you used to have trouble lugging home your weekly supply of cold, creamy goodness, but lately it's been getting easier. Well, don't go crazy.
You're not getting stronger -- the ice cream cartons are getting lighter. The traditional half-gallon carton of ice cream has given way to many 1.75-quart cartons. And some makers, such as Unilever's
This makes me think of stock dilution, which is another example of insidious erosion of value. It can harm your portfolio's performance, if you're not paying close attention.
Stock dilution happens when a company issues additional shares, which decreases, or dilutes, the value of existing shares. For example, imagine Home Surgery Kits (TICKER: OUCHH) has 100 million shares outstanding, trading at about $50 each. Its current market value is $5 billion (100 million times $50 equals $5 billion).
Let's say that, to raise money, the company issues an additional 10 million shares. The company is still valued at about $5 billion, but now that's divided between 110 million shares -- so each share is worth roughly $45 ($5 billion divided by 110 million is $45). The shares have been diluted in value. To visualize this, imagine a pizza being cut into smaller and smaller pieces, or an ice cream sandwich being split among more and more children.
If the money raised is used to generate additional sales and earnings, long-term economic dilution might not occur. The money might end up generating enough to more than make up for the short-term dilution. In such a case, the increase in share count would be worth it. That's not the case if shares are issued to finance value-destroying projects or to offset overly generous stock options awards.
Companies that have been in the news lately regarding stock dilution include National City
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If you're looking for companies that represent good values, as opposed to companies that may be diluting their own value, I encourage you to test-drive, for free, our Motley Fool Inside Value newsletter.
Longtime Fool contributor Selena Maranjian does not own shares of any company mentioned in this article. National City and Unilever are Motley Fool Income Investor recommendations, and Washington Mutual is a former one. The Motley Fool is Fools writing for Fools.