The Anti-Buyback: Sony Massively Dilutes Shareholders

I joined CNBC’s Asia desk last night to discuss Sony’s (SNE) plan to issue $3.6 billion in stock and convertible debt.

If you cannot view the embedded video, follow this link.

The good news is that Sony’s is massively expanding its image sensor business, which is one of the few areas where Sony really excels these days. Sony’s sensors — which go into digital cameras, including those in the iPhone 6 and the Samsung Galaxy S6 — are considered to be some of the very best in the industry and several years ahead of most rivals. At over 22%, according to Sony filings, the sensor segment has the highest returns on invested capital in Sony’s empire and by a wide margin. So it makes all the sense in the world to pour more capital into it.

Now for the bad news: In order to fund the expansion, Sony diluted its shareholders by a whopping 11%. Not surprisingly, Sony shares sold off aggressively.

Shareholder dilution are two words I rarely like to hear. There are exceptions, of course. REITs, MLPs and BDCs are required to pay out substantially all of their profits as dividends (“distributions” in the case of MLPs). For these companies to expand, they have no choice but to raise new capital via stock and debt offerings. But for standard corporations, which can retain earnings for growth, new share issues are something you generally only seen in the very early years, when they are growing like gangbusters, or during a crisis when they are facing insolvency.

Neither of these conditions were true for Sony, and a mature company Sony’s size has no business diluting its shareholders to this extent. If Sony needed capital to fund expansion, it should have followed Dan Loeb’s advice from a few years ago to sell off some of its underperforming business segments. This level of dilution shows a complete lack of consideration for the company’s long-suffering shareholders.



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