Will these companies take advantage of the high stock prices brought by Buffett to issue additional shares, thereby diluting shareholder equity?

Will these companies utilize the high stock prices driven by Buffett to issue additional shares, diluting shareholder equity?

Background Analysis

Warren Buffett's investments in Japan's five major trading houses (Mitsubishi Corporation, Mitsui & Co., Itochu Corporation, Sumitomo Corporation, and Marubeni Corporation) through Berkshire Hathaway triggered the "Buffett Effect," leading to significant stock price increases for these companies. Elevated stock prices do provide potential financing opportunities, such as raising capital through share issuances (including public offerings or private placements). However, whether this would lead to dilution of shareholder equity requires assessment from multiple perspectives.

Assessment of Share Issuance Likelihood

• Attractiveness of High Stock Prices: Following Buffett's investment, the price-to-earnings (P/E) ratios and market capitalizations of these trading houses surged significantly. Management may view this as a "window of opportunity" to utilize the high valuations for financing business expansion, debt repayment, or acquisitions. This is common in capital markets, especially against the backdrop of a relatively sluggish Japanese stock market, where high share prices can lower financing costs.
• Historical and Actual Cases: As mature enterprises, the five major trading houses have historically relied more on bank loans or bonds for financing rather than frequent share issuances. Since Buffett's investment began (starting in 2020), these companies have not conducted large-scale share offerings. For instance, Mitsubishi Corporation and others have preferred rewarding shareholders through dividends and buybacks rather than diluting equity. This reflects the conservative nature of Japanese corporate culture, which emphasizes long-term shareholder value.
• Buffett's Influence: Buffett himself favors companies that avoid diluting shareholder equity (e.g., financing through internal cash flows). His investments often encourage improved corporate governance and discourage short-term behavior. If these trading houses hastily issued new shares, it could damage their relationship with Buffett and provoke shareholder dissatisfaction.

Risks of Equity Dilution

• Dilution Mechanism: Share issuance increases the total number of shares outstanding, reducing existing shareholders' ownership percentage and diluting earnings per share (EPS) and equity. If shares are issued below intrinsic value, the dilution effect is more pronounced. However, if proceeds fund high-return projects, long-term shareholder value may increase.
• Mitigating Factors:
  • Regulation and Shareholder Protection: Japanese securities regulations require shareholder approval for share issuances and mandate disclosure of fund usage. As a major shareholder (holding approximately 8-9%), Buffett has significant influence to oppose unfavorable issuances.
  • Corporate Strategy: These trading houses are focusing on sustainable growth (e.g., energy transition) and are more likely to utilize internal funds or debt financing rather than share issuance. 2023 data shows they spent far more on share buybacks than on new issuances.
  • Market Environment: With rising global interest rates and volatility in the Japanese stock market, the appeal of share issuance diminishes if stock prices correct.

Conclusion and Recommendations

Overall, the probability of these companies conducting large-scale share issuances in the short term to capitalize on high stock prices is low. Such actions could contradict Buffett's investment philosophy and are not part of their core financing strategies. The Buffett Effect primarily brings reputational benefits and capital inflows rather than directly driving dilutive actions. However, investors should monitor company announcements. If share issuance plans emerge, assess their impact on long-term value. It is advisable to review financial reports and shareholder meeting materials to guard against potential dilution risks. Shareholders may diversify investments to mitigate such uncertainties.