Preparing for Earnings Season – Monitoring Equity Dilution of US Cannabis MSO’s 

This article will examine equity dilution and the opposite action, share buybacks. Equity dilution is not discussed as much as revenue, EBITDA, or cash flow growth. Those are key company metrics, but it is good to ask how much of the pie you have as a shareholder, which changes over the year.

What is the difference between equity dilution and share buybacks, and why does it matter?

Simply stated, if you buy 1% of a company this year, you will not own 1% of the company in the future. Likely, the company is either going to increase or shrink the share count of the company. At some point in the future, you might own 0.8% or 1.2%, depending on whether the share count is shrinking or increasing. Typically, owning more than less of the company is always better.

Mature companies typically buy back shares with excess cash flow, rewarding shareholders with a larger share of the company’s pie. In 2023, the companies that make up the S&P 500 bought back $815B in shares in their company’s stock. In 2025, Goldman Sachs estimates that this number will reach over $1 trillion for the first time. This has been very rewarding for shareholders, as the company’s earnings are shared amongst fewer shareholders. 

Early-stage companies typically increase their share count by selling more shares to raise additional cash to invest in the business’s activities. For example, companies often have a Seed, A, B, and C financing round with higher stock prices at each stage. 

Most US Cannabis MSOs are moving into a more mature stage and require less new capital. So, it makes sense to measure which companies are reducing their share count, which companies are expanding their share count, and by how much.

Ranking the US Cannabis MSO for Share Dilution or Buyback

Here are a couple of key points. First, we rank by dilution, so a smaller number is better. If you see a negative number, it is a share buyback, which is very positive for shareholders. Second, you will note that there will be small fluctuations of single-digit percentages each year. Typically, small changes are due to options grants, acquiring other small brands or companies, previously exercised warrants, or convertible debentures. If the percentage is above 10%, typically, the company offers new shares to investors in a formal equity offering. 

How we calculated dilution by taking the outstanding share count yesterday and comparing it to the outstanding share count one year ago. Before we look at the rankings, let’s consider some averages. The S&P 500 companies are estimated to have share buybacks of about 2% this year, so the ranking below would show as -2%. For the MSOs, only one company had a share buyback, and one was flat. The other MSOs have small dilutions, and four companies have major dilutions of over 40%. When looked at as a whole, the dilution across the US MSO averaged 14.4% or a median of 2.7%. We can see a large difference between the average and median as four companies had large dilutions, which skewed the median and average.

The table above shows that equity dilution is still necessary for some MSOs as cash flows are not yet fully sufficient to support company operations. However, most companies have had smaller transient equity dilutions of less than five percent. As mentioned above, this is more likely for option grants, previously offered convertible debt, etc. This is similar to other analyses we have done on cash flow, which shows many MSOs this year are now becoming cash flow positive and, in the future, could consider share buybacks.

How Can One Monitor and Predict Share Dilutions

Companies may share some information about equity dilution in their earnings press release. But you can calculate it yourself; typically, in the balance sheet section, the company will highlight the outstanding shares on the earnings date compared to the period they are comparing to. We will share this in our editorials about companies’ earnings reports. 

How can you predict future dilutions or buybacks? The ratio of Levered Free Cash flow to working capital can be determined. We will finish the week by looking at Levered Free Cash Flow and Working Capital and then combining them into one formula. Besides explaining, we will rank the MSOs in these categories. By Friday of this week, we will have discussed these topics so you can predict yourself if companies require further dilution.

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