Andy Brough on Share Options

A very informative interview with Andy Brough of Schroders:

Mr Brough says: “Golden rule number one is keep an eye on the share count, because at the end of the day earnings and assets have to be spread over all those shares”.

He cites Hut Group, which joined the market last year with a 970 million share count – although the flotation triggered the vesting of 216 million employee options:

So the share count will grow by 20%-plus over time as these options are exercised. Mr Brough argues Hut Group will have to grow earnings by 20% “just to get back to where the group was”.

Mr Brough’s remarks are a reminder to check the share count and dilution risks at our own shares. I have used SharePad to compare the five-year share-count changes within my portfolio:

A rescue rights issue caused Tasty’s share count to balloon, while Tristel issued a few shares the other year for an acquisition. But on the whole, extra shares have been kept to a minimum.

This table lists the share counts and total options, LTIPs and similar within my portfolio, with the stats taken from the latest annual reports:

Share count Options Dilution
Andrews Sykes 42,174,359 0 n/a
Bioventix 5,207,835 55,605 1.1%
City of London Inv 26,560,707 521,875 2.0%
FW Thorpe 118,935,590 1,044,482 0.9%
M Winkworth 12,733,238 562,331 4.4%
Mincon 211,675,024 4,825,000 2.3%
Mountview Estates 3,899,014 0 n/a
S&U 12,133,760 17,000 0.1%
System1 12,599,784 1,685,237 13.4%
Tasty 141,089,758 3,780,000 2.7%
Tristel 45,296,533 2,538,460 5.6%

Andrews Sykes and Mountview Estates (in which Mr Brough mentions in the video as being a personal shareholder) do not operate option schemes. Outstanding options at Bioventix, FW Thorpe and S&U are modest, too.

City of London Investment buys shares for its Employee Benefit Trust to mitigate dilution, which is a cash flow cost – rather than a dilution cost – to shareholders.

M Winkworth’s share count has barely changed over the last ten years, so I can live with its 4% forthcoming dilution. Mincon’s 2% dilution seems fine.

System1 with 13% looks awful. But many of the options start to convert into shares only if the price hits 500p, and the bulk require a price of almost £10. I will consider the dilution matter if/when the shares double from here to 500p.

Tasty’s dilution has increased following the implementation of a new ‘growth share scheme’. Essentially the chief exec could end up with an extra 10% of the company if the share price reaches 16p by the start of 2025. The share price was 3p at the time of this scheme’s proposal, and at the time I easily accepted the chance of a five-fold share-price gain in exchange for 10% dilution over four years.

For Tristel, the 5.6% dilution shown in the table relate to options that have all vested. The dilution is not insignificant, but bear in mind most of the options were awarded when the shares were 275p and would vest if the price reached 350p, 425p and 500p. So shareholders can’t really begrudge this 5.6% dilution.

Tristel’s potential dilution has also been increased following the last annual report. Total dilution could be 7.4% following the approval of the 2021 executive performance plan. The new options require 13% profit CAGR until 2024 plus a c750p share price for full vesting (versus c500p at the time of the plan’s proposal).

I would say Tristel’s management seem to be motivated by options and to date they have worked, but I would prefer if Tristel could operate without so much dilution. Mind you, I note the shares of Andrews Sykes and Mountview Estates without option schemes have not performed as well as Tristel during recent years – so some pragmatism is required on this subject I feel.

What are your thoughts on share counts, options and dilution? Is Mr Brough right to say this matter is the “golden rule number one” for investors?


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That’s an interesting question. To an extent, share options appear to align board and shareholders but it does depend on the strike price. If the option costs the director nothing, then it starts to get questionable but then again it depends on the target for triggering the award. It is certainly a factor. But not necessarily the key factor. Boards have other ways of skewing rewards in their favour

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this is a great idea, and I will do the same on my shares in SP too.

As fo this being rule no#1 for investors. I’d say that for the effort it takes to do this, and the simplicity of it, what it tells us, then it certainly should be up there as part of an early check. The point made about the 20% increae in share count says it all: the EPS have to increase 20% just to bring it back in step. too easily overlooked, so a great piece. Thanks @MaynardPaton . I am 5mins into the video, and have the rest to watch tomorrow.

lastly, the piece about getting our ideas from our network is such an important piece. And to listen to all views.

Reds show a significant increase (AMC is just a silly play, a small position/punt meme stock *may well exit next week ; CAPD is a recent small monitor position)

Greens show a reduction in share count: buybacks and cancellation

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