Let me tell you a story about a company whose share price has risen 50x since 1999


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