Compound growth of 19% for 21.5 years
Wow, a tech company?
No, a retailer
Well, then they must have opened lots of stores?
At a rate of 4% per annum so 3x the store base, not 50x
So they’ve increased sales in each store?
Nope, barely changed +1.5% CAGR
Ok, a massive increase in profitability per store?
Some – grown at +4% CAGR – increased efficiencies & operating leverage of spreading the fixed costs across more stores
Still doesn’t explain the 50x growth in share price
oh I know, the share has rerated massively from a low PE to a high PE
No, gone the other way from 20x to 18x
I give up, how did the share price go up 50x?
Here’s a clue
Because EPS went up 55x
But you said they didn’t grow massively, you said operating income is only up 5x & it didn’t re-rate
Because they bought back 85% of their shares over this period
They spent every $ of their $21bn of free cash flow buying shares
What about their dividend?
Nothing, zero, zilch
Well think about it
If a company pays a dividend, they get nothing for it
It’s like investing their profits in a 0% percent return opportunity
But if they buy their own shares at an attractive valuation, they’re investing in a low risk, positive return opportunity without the distraction of deals & cost of fees
Plus, if they buy more when the PE is low, the return is higher – these guys regularly bought back 10% of their shares when their PE multiple was 13 / 14 so they invested at an 8% / 7% return
The compounded impact over time is massive
But don’t shareholders need dividends?
Only short term shareholders
Long term shareholders surely want what’s best for the company
And that’s to invest their profits most productively
Besides, they can sell shares & create their own dividends
And buybacks are more tax-efficient for many shareholders:
– tax on dividends is higher than capital gains tax in most places
– there’s often withholdings tax on dividends for foreign shareholders
So you think companies should buyback shares and not pay dividends?
Only if their valuation is low
If you’re a tech company on a 1-2% free cash flow yield, don’t bother – who wants to invest at those rates?
they only do it to offset their employees cashing in options and increasing the share count and are then “dishonest” and exclude these buybacks to offset dilution from employee compensation in their FCF calcs
So European banks on 0.4x book value?
Ditch the divi and buyback stock
What about cyclicals?
If they buyback when prices are high, it offsets the EPS decline in the down cycle and accelerates growth in the next upcycle
You don’t need to invest in the fastest-growing businesses for great returns, you just need a good business with a great management team, who really understand capital allocation
What’s the company?
Autozone – AZO US