Share dilution is one of those stock market nightmares that keeps investors awake when they should be sleeping. Even news of fairly mild levels of dilution can lead to notable sell-offs, a situation that has been evident with the stock of CSW Industrials (NASDAQ: CSWI) in recent days.
Week-to-date as of mid-afternoon Friday, according to data compiled by S&P Global Market Intelligence , the veteran company's stock price had fallen by nearly 16%.
1.1 million reasons to be worried
Many investors reacted negatively to CSW's news, delivered Wednesday, that it was floating a new issue of its common shares. The originally planned 1 million share flotation was upsized to 1.1 million. This was priced at $285 per share.
CSW said that it granted the issue's underwriters, a syndicate that includes finance sector heavyweights JPMorgan Chase and Goldman Sachs , a 30-day option to collectively buy up to 165,000 additional shares.
The gross proceeds of the issue are $313.5 million. CSW said that it intends to use its share of these monies to retire outstanding debt, and for "general corporate purposes." The latter could include acquisitions, although the company did not hint at what kind of assets it might consider purchasing.
The new share flotation was to close on or about Friday, Sept. 6.
Indebtedness not such a concern
CSW has actually done a decent job of eliminating its debt, as its long-term borrowings decreased in its most recently reported quarter on both a sequential and year-over-year basis ($170 million, against the previous quarter's $206 million and the year-ago figure of $264 million).
As is typical in such cases, however, dilution is more of a concern for the market. It's not too severe in this instance, as pre-issue, CSW had more than 15.5 million outstanding shares of that common stock. Investors, then, might be overreacting to the company's latest financing news.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy .
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