Adjusted long term outstanding shares

What Is Adjusted Long-Term Outstanding Shares?

Adjusted Long-Term Outstanding Shares refers to the total number of a company's shares that have been issued and are held by investors over an extended period, taking into account the cumulative impact of various corporate actions. This metric falls under the broader discipline of Corporate Finance, as it is crucial for understanding a company's capital structure and its evolution over time. Unlike a simple snapshot of outstanding shares at a single point, Adjusted Long-Term Outstanding Shares aims to provide a more comprehensive view by considering adjustments from events that alter the share count, such as new share issuances, share repurchases, stock splits, and the potential conversion of certain financial instruments. It reflects the dynamic nature of a company's equity base, which is vital for long-term financial analysis and valuation.

History and Origin

The concept of tracking and adjusting outstanding shares has evolved alongside the complexity of corporate financial engineering. Initially, companies primarily issued authorized shares to raise capital, and the count of issued shares remained relatively stable. However, as capital markets matured and corporate governance became more sophisticated, companies began to actively manage their share counts through various mechanisms.

A significant shift occurred in the mid-20th century with the increasing prevalence of practices like share repurchases. While buybacks existed earlier, their widespread adoption gained momentum in the latter half of the 20th century, particularly from the 1980s onwards, as companies increasingly focused on maximizing shareholder value. This era saw a greater emphasis on returning capital to shareholders through means other than just dividends. Academic research has extensively explored the strategic role and financial implications of share buybacks, noting their evolution from an infrequent tool to a significant component of corporate finance.¹⁰ This intensified activity made the simple count of shares outstanding insufficient for long-term analysis, necessitating a more "adjusted" view to reflect these ongoing capital management strategies. The U.S. Securities and Exchange Commission (SEC) provides guidance on how companies must report their common shares outstanding, highlighting the importance of accurate disclosure due to potential scaling errors and differing reporting dates between various financial statements.⁹

Key Takeaways

• Adjusted Long-Term Outstanding Shares provides a historical view of a company's equity base, accounting for cumulative changes.
• It considers corporate actions such as new issuances, buybacks, stock splits, and potential dilution from convertible securities.
• This metric is crucial for accurate trend analysis, per-share metric calculations, and understanding shareholder dilution or concentration over time.
• It offers a more complete picture than a static outstanding shares figure, which can fluctuate frequently.

Formula and Calculation

While there isn't a single universal "Adjusted Long-Term Outstanding Shares" formula, the concept involves a series of adjustments to the basic outstanding share count over a period. It essentially tracks the evolution of shares by incorporating all events that change the number of shares held by investors.

For any given period (e.g., year-end), the adjusted long-term outstanding shares could be conceptualized by starting with the initial outstanding shares and cumulatively applying adjustments:

Where:

• Outstanding Shares(_{\text{Beginning}}): The number of shares held by investors at the start of the long-term period.
• New Shares Issued: Shares distributed through events like a public offering) or secondary offerings.
• Shares Repurchased: Shares bought back by the company, which reduces the number of shares outstanding and become treasury stock.
• Net Shares from Options/Convertibles: The net increase in shares due to the exercise of stock options, warrants, or the conversion of convertible securities (like convertible bonds or preferred stock). This accounts for potential dilution.
• Shares from Stock Splits: The increase in shares resulting from a forward stock split.
• Shares from Reverse Splits: The decrease in shares resulting from a reverse stock split.

Interpreting the Adjusted Long-Term Outstanding Shares

Interpreting Adjusted Long-Term Outstanding Shares involves analyzing the trends in a company's share count over time, which provides insights into its capital management strategy and its impact on shareholders. A rising Adjusted Long-Term Outstanding Shares count often indicates that a company is issuing new equity, perhaps to fund growth, acquisitions, or to compensate employees through plans like employee stock ownership plans (ESOPs)). While new issuances can raise capital, they also lead to shareholder dilution, reducing each existing shareholder's proportionate ownership.

Conversely, a decreasing Adjusted Long-Term Outstanding Shares count suggests that the company is engaging in significant share repurchases, often signaling a return of capital to shareholders or an effort to boost per-share metrics. For instance, a reduction in shares outstanding can automatically increase earnings per share (EPS)), even if net income remains constant. Analyzing these long-term trends allows investors and analysts to gauge the consistency of a company's capital allocation decisions and their potential effects on per-share metrics, such as EPS and dividend per share.

Hypothetical Example

Consider "Tech Innovations Inc." (TII), a hypothetical publicly traded company.

Year 1: TII has 100 million shares outstanding.
Year 2: TII issues 10 million new shares to fund an expansion, bringing the total to 110 million.
Year 3: TII initiates a share repurchase program, buying back 5 million shares. Outstanding shares reduce to 105 million.
Year 4: TII announces a 2-for-1 stock split. Each shareholder now owns twice as many shares, so the 105 million shares double to 210 million.
Year 5: Employees exercise 2 million stock options, adding to the share count, bringing the total to 212 million.

By tracking Adjusted Long-Term Outstanding Shares, an analyst can see the progression:

• Year 1: 100 million
• Year 2: 110 million (100 + 10)
• Year 3: 105 million (110 - 5)
• Year 4: 210 million (105 * 2)
• Year 5: 212 million (210 + 2)

This adjusted view allows for consistent comparison of per-share metrics over this five-year period, as it normalizes for changes in the share base.

Practical Applications

Adjusted Long-Term Outstanding Shares is a critical metric for various stakeholders in the financial world:

• Investors and Analysts: They use this figure for accurate trend analysis of per-share metrics such as earnings per share (EPS)), dividends per share, and book value per share. Fluctuations in the share count can significantly distort these metrics if not properly accounted for. For example, a company might show higher EPS simply by reducing its Adjusted Long-Term Outstanding Shares through buybacks, without necessarily increasing its net income.⁸,⁷
• Valuation Models: Financial models often require a consistent share count for multi-year projections. Using an adjusted long-term figure helps create more reliable forecasts for future earnings, cash flow, and ultimately, company valuation. It impacts calculations for market capitalization, a key indicator of a company's size.
• Corporate Management: Companies track their Adjusted Long-Term Outstanding Shares to evaluate the impact of their capital allocation decisions, such as whether to issue new equity, repurchase shares, or utilize convertible securities. These decisions affect shareholder dilution, capital structure, and overall financial health. The implementation of share buybacks, for instance, has significant corporate governance implications, as boards must balance returning capital with long-term strategic objectives.⁶
• Regulatory Compliance: Public companies are required to disclose their outstanding shares in their financial reporting to regulatory bodies like the SEC. The balance sheet and other filings provide the raw data necessary for calculating adjusted figures. Companies must ensure accuracy in these disclosures, as highlighted by SEC guidance on reporting common stock shares outstanding.⁵

In 2023, global share buybacks reached a new record, surpassing $1 trillion, underscoring the ongoing relevance of understanding how these actions continually modify the Adjusted Long-Term Outstanding Shares.⁴

Limitations and Criticisms

While Adjusted Long-Term Outstanding Shares offers a more comprehensive view than a simple current share count, it is not without limitations:

• Complexity: The "adjusted" nature can make it more complex to calculate and interpret, especially for companies with frequent and varied corporate actions such as the issuance of many types of stock options or convertible securities.
• Lack of Standardization: Unlike basic or diluted shares outstanding, "Adjusted Long-Term Outstanding Shares" is not a universally standardized metric. Different analysts or companies might apply different adjustments based on their specific analytical needs, potentially leading to inconsistencies in comparisons.
• Historical vs. Forward-Looking: While useful for historical trend analysis, it does not inherently predict future changes in share count, which remain subject to management decisions, market conditions, and regulatory changes.
• Potential for Manipulation: Companies might strategically time share repurchases to artificially inflate per-share metrics like EPS, which can mislead investors if the underlying operational performance has not improved. This criticism is often leveled at buybacks, suggesting they can be used to manage reported earnings.³ Some studies, however, argue that buybacks are generally beneficial to firms and their equityholders, especially when stocks are undervalued.²,¹

Adjusted Long-Term Outstanding Shares vs. Diluted Shares Outstanding

Adjusted Long-Term Outstanding Shares and Diluted Shares Outstanding are related but serve different purposes.

The confusion arises because both concepts involve "adjustments" to the basic share count. However, Diluted Shares Outstanding focuses on immediate potential dilution from existing financial instruments, while Adjusted Long-Term Outstanding Shares aims to provide a more holistic and smoothed view of the share count's journey over a longer historical timeline.

FAQs

What causes a company's Adjusted Long-Term Outstanding Shares to change?

A company's Adjusted Long-Term Outstanding Shares can change due to various corporate actions, including issuing new shares (e.g., through an initial public offering (IPO)) or secondary offerings), buying back its own shares (share repurchases), performing stock splits or reverse stock splits, and the exercise or conversion of dilutive securities like stock options and convertible securities.

Why is it important to track Adjusted Long-Term Outstanding Shares?

Tracking Adjusted Long-Term Outstanding Shares is important because it provides a more accurate historical context for per-share metrics like earnings per share and dividends per share. Without adjusting for changes in the share count over time, financial trends can appear distorted, making it difficult to assess a company's true long-term performance and the impact of its capital management decisions on shareholders.

How do share buybacks affect Adjusted Long-Term Outstanding Shares?

Share repurchases decrease the number of shares held by investors, thus reducing the Adjusted Long-Term Outstanding Shares. Companies typically buy back shares to return capital to shareholders, increase earnings per share (EPS)), or prevent dilution from employee stock options. These repurchased shares often become treasury stock.

Is Adjusted Long-Term Outstanding Shares reported on financial statements?

No, "Adjusted Long-Term Outstanding Shares" is not a specific line item on a company's financial statements like the balance sheet. The balance sheet typically reports "shares outstanding" at a specific point in time, and other disclosures detail changes in equity. Adjusted Long-Term Outstanding Shares is an analytical metric derived by financial analysts and investors to understand the cumulative impact of share-altering events over a prolonged period.