Companies That Steal Your Future

Published in Investing Strategy on 6 April 2010

Not only do some shares not pay a dividend, they can effectively have a negative yield.

It took many centuries for negative numbers to be generally accepted in mathematics. As late as 1758 Francis Maseres damned them in a treatise, alleging that they "darken the very whole doctrines of the equations and make dark of the things which are in their nature excessively obvious and simple."

'Less than nothing' has lost its paradoxical flavour but can a share yield less than nothing? Don't you just buy them and that's it? 

In most cases, yes and you may enjoy yields over 7% even with FTSE giants like Man Group (LSE: EMG) and Aviva (LSE: AV). Even with a zero dividend you are not losing anything, or are you?


Take a look at Cyan (LSE:CYAN), the microchip designer. Its capitalisation is a paltry £9.7m but since flotation in 2005 it has been back to investors four times (including twice last year) to raise a total of £11.5m in share placings. 

Cyan's many small shareholders may have felt unaffected when the company issued 95m new shares last October for "general working capital requirements" but this was a 17% dilution of their ownership of the company. Cenkos Securities who bought the new shares got them at a handy 10% discount, one which ordinary shareholders did not get the opportunity to enjoy.

How much dilution has there been in total? You can always find the original number of shares (for AIM listed companies at least) in the admission document on the company's website. 

Cyan floated with 84.3m shares in 2005. How many are there now? This recent RNS tells us there are a staggering 655m. That's a 677% dilution. If the company ever moves into profit (which has been a long time arriving, hence the need for regular issues to keep going) the original holders will only get 13% of the profits per share they might have hoped for when buying in 2005. Considering the risk they were taking, that seems pretty mean.

Negative yield

This leaking of equity, draining each share of its earning power, is like a negative yield. 

In 2009 Cyan issued a total of 164m, a 34% dilution. That's just the same as if the shares, then trading at about 2p, had 0.5p forcibly returned to the company, a -25% yield. As it happens that's about the amount the shares have fallen to today's 1.41p.

The most prolific issuer of shares I have come across is Earthport (LSE: EPO) who have made 24 placings or issue of warrants (also dilutive) since it floated on AIM ten years ago.

Here's the recent record of three blue sky outfits and an internet telephony firm (Coms):

Cyan (LSE: CYAN)-25%-60%-38%
Pursuit Dynamics (LSE: PDX)-6%-4%0%
Corac (LSE: CRA)-20%0%-13%
Coms (LSE: COMS)-66%0%-52%

What to look for

In the company's regulatory announcements (e.g. Cyan's) look out for Issue of equity, Placing, Open offer, Rights issue or Exercise of warrants. Be suspicious of shares issued at large discounts. Last year Coms sold shares at discounts of 48% and 45%, something it has made a habit of.

The first three companies in the table have innovative and useful technology, though not fully developed in Corac's case.

I am not saying you should avoid shares with negative dividends, only to be aware when you buy them that the company may be surreptitiously stealing from your future earnings to fund R&D and operating costs.

More from Alun Morris:

Alun has a short position in Earthport.

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CunningCliff 06 Apr 2010 , 1:59pm

Hi Alun,

I see you're still shorting Earthport (LSE: EPO).

I cannot think of a worse company. To me, EPO is perhaps the biggest basket case listed on the LSE and AIM!

Then again, perhaps EPO will be back for a 25th equity placing, who can say? ;0)


Philmoco 07 Apr 2010 , 11:22am

Don't forget Osmetech [OMH]!
Now they've squeezed AIM investors dry and the products are ready to make real sales, the management have made further placings with themselves and friends and are moving over to become part of a recent cash rich IPO in NASDAQ - thieving barstewards!

gold22 07 Apr 2010 , 2:49pm

I would like to nominate another company that should be added to this list, In ten years plus it has never made any money and by now must have made nearly that many placings. It is RGT Regen theraputics.

highlander39 08 Apr 2010 , 11:36am

FTSE 100 highest dividend yielding stocks top 50:

DaveStephens1980 12 Apr 2010 , 5:31pm

If we are talking about negative type dividend action, how about two companies managed by Fortress Investment Group. They instigated heavily dilutive convertible bond issues for Mapeley and Eurocastle Investment Limited which private investors could not invest in unless they had EUR 50,000 to play with. It effectively wiped out most of the private investors shareholdings. Lets hope the LSE never allows them to list one of their managed companies again.

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