Tags: auto | zone | king | stock | buybacks

Is This Auto Parts Company King of Stock Buybacks?

autozone corporate logo symbol emblem
(Ken Wolter/Dreamstime)

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Tuesday, 19 March 2019 01:13 PM Current | Bio | Archive

There are two ways a company can choose to return cash to shareholders. The first method is by paying dividends to shareholders, either on a recurring basis or via a special dividend. The second way to return cash is through share buybacks, whereby a company repurchases a portion of its outstanding shares.

The objective of share repurchases is to reduce the number of shares outstanding, which will help grow future earnings per share. When shares are repurchased and retired, each remaining share captures a higher portion of earnings, hence lowering the denominator in the EPS equation.

In addition, while dividends are taxable, share repurchases are a tax-advantaged method of capital returns. Auto parts retailer AutoZone (AZO) is among the most effective at buying back its own stock to grow EPS—and by extension—its share price.

Strong Fundamental Tailwinds

AutoZone is the leading retailer of auto parts and accessories in the United States. It currently has 5651 stores in the U.S., 568 stores in Mexico and 22 stores in Brazil. AutoZone is benefiting from a very positive fundamental trend in North America, which is that consumers are keeping their cars on the road for longer periods of time. Rather than buy new vehicles more frequently, consumers are choosing to have minor repairs done.

The average age of the U.S. vehicle fleet is expanding, which is a major boost for auto parts retailers like AutoZone. The company has taken full advantage of this trend. Despite a tough environment for specialty retailers, AutoZone continues to generate strong growth. In the most recent quarter, domestic same store sales, which measures sales at stores open at least one year, increased 2.6% for the quarter.

Net income for the quarter increased 1.8% over the same period last year to $294.6 million, while diluted earnings per share increased 10.7% to $11.49 per share. The company’s earnings growth benefited from tax reform, as well as share repurchases. AutoZone reduced its diluted share count by approximately by 8% from the same quarter last year. Such a large reduction in the share count is unusual, but it becomes clear that AutoZone’s policy of aggressive share repurchases has worked to the benefit of shareholders.

Proven Wealth Creation

Not all companies utilize share buybacks effectively. Sometimes, a company pays too high a price for its own shares. In other instances, companies will spend money to buy back shares, only to offset the impact of dilution caused by employee stock option grants. Therefore, the best way to judge whether a company has properly conducted its buyback program, is the performance of the stock.

In this case, AutoZone’s buyback plan has clearly worked. Over the past 20 years, AutoZone stock has returned 18.2% per year, on average. By comparison, the SPDR S&P 500 ETF (SPY) has returned just 5.8% per year in the past 20 years. Put simply, AutoZone stock has returned more than triple the average return of the S&P 500 Index over the past two decades.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Over the past 20 years, AutoZone stock has returned 18.2% per year, on average. By comparison, the SPDR S&P 500 ETF (SPY) has returned just 5.8% per year in the past 20 years. Put simply, AutoZone stock has returned more than triple the average return of the S&P 500 Index over the past two decades.
auto, zone, king, stock, buybacks
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2019-13-19
Tuesday, 19 March 2019 01:13 PM
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