Linn Energy Stock Ruined by Rapid Dilution

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With the massive dilution of its stock over the last decade at more than 25 percent compound annual growth rate, Linn Energy has brought its shareholder value to almost nothing.

Overzealous Dilution

Starting in 2005, Linn Energy shareholders have been diluted at an astonishing rate of over 25 percent of the yearly CAGR rate. The investors who bought just shares five years ago have also seen their investment diluted by over 15 percent.

The issue that this creates is that as new shares are issued, all previous shares have their voting weight reduced, and shareholders end up with reduced ownership of the company. This dilution creates an enormous cost for shareholders for subsequent equity increases, and also creates strong pressure on the market to value Linn Energy shares close to their minimum value which in turn increases the dilution effect.

From Monthly Payouts to Nearly Nothing

The question becomes why did all those investors actually buy Linn Energy stock? There are many reasons, but three in particular stand out.

Firstly, as the Fed’s interest rates have been at an all-time low over the last several years, a lot of investors have turned to higher risk, higher yield equities to try and inject some sorely needed income into their portfolios.  Those investors turned to Linn Energy as one of the few stocks that was promising the kind of yield that was not available elsewhere given the Fed’s low rates.

Secondly, the company switched from quarterly payments of earnings to monthly payments, mid 2013. This provided investors with a more direct and regular payment schedule, as opposed to a lump sum each quarter. Finally, a lot of investors thought that the price of $100 for a barrel of oil would remain the standard price, not even considering the possibility that it would not only drop to under half of that value, but continue to spiral afterwards. All of which is making the stock less attractive than at any time before.

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