AutoZone revealed a stunning fact in its September earnings call: “We have bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business.” In 1998, the year AutoZone began its repurchase program, the company had 152 million shares outstanding. AutoZone has since repurchased a total of 154 million shares at an average price of $219, for a total investment of $33.8 billion. Shares outstanding fell 8.2% per year, on average. The average repurchase price is 91% lower than AutoZone’s current $2,500 per share price.
I stopped by an AutoZone the other day since I needed to buy a new taillight assembly for my car and they told me to buy it off Amazon since I’d get it faster and that it would be cheaper as well. They were right it was 120 on Amazon versus 210 at AutoZone, but the delivery timeframe was about the same.
I think part of this is they don’t specialize as much in exterior body stuff like taillight assemblies, but I thought it was an interesting data point. The sample size is one customer transaction at one store so you can’t really draw conclusions, but it did get me wondering about the long-term threat from eCommerce on AutoZone and how this could potentially change their capital allocation strategy.
I’d say as an investor the more uncertainty there is about a companies potential future the more I prefer dividends and special dividends over buybacks as buybacks increase the percentage of the total return that is reliant on the terminal value of the business at the end of the holding period. For many of my midstream investments even if the terminal value of these assets is zero in 2050, I’ll have received so much cash from these assets it doesn’t matter a ton in my opinion.
On a related note I’d love to see a blog post with your thoughts on the midstream sector. The industry seems to be consolidating and there is an increased focus on capital returns with what seems like generally low valuations. There also seem to be barriers to entry in terms of the difficulty combined with a lack of desire for large greenfield pipeline projects combined with what appear to be a decent number of high ROIC incremental expansion opportunities available to many midstream companies.
I agree, if there's a terminal value question then dividends are the right move. Dan has written about some midstream companies in the past and they're certainly something we'll consider for the future.
That EBITDA is shown net of stock compensation is testament to the corporate influence on FASB accounting rules. These rules create cover for self dealing management teams to throw unsophisticated investors off the truth (or under the bus).
That said, Performance based restricted stock awards (RSU’s) should be designed to create incentives for high performing employees to stay. While senior management loves to abuse this by rewarding themselves even in times of mediocrity, RSU’s do encourage retention in the ranks.
From the employee perspective RSU’s are both a form of compensation but also a stake in the continued price appreciation of a companies stock. By nature of their restrictions they also creat a hurdle for competitors to lure away high performing employees and an incentive for low performers to jump to those same competitors.
The takeaway is when evaluating a company it is valuable to understand how stock awards are administered and not simply view them as a line item to adjust. Figuring out how this is administered may be as simple as asking or may be intentionally hidden by management to avoid scrutiny. Companies that use RSU’s to encourage performance and retention are more likely to provide more transparency given that information needs to be disseminated widely among employees to gain the greatest effect.
Brent, you make a good point that not all stock comp is created equal. I agree that it should be analyzed with nuance rather than as a single line item to adjust.
I don't get the point about Capital Leakage. If a company pays cash for comp, then it will be less cash to buyback stock. So, we will end up with same IRR?
When a company issues stock comp they estimate the forward returns of their shares to determine how much stock they should issue. If they assume lower forward returns than occur, they've issued more stock than intended. The charges against earnings were less than the value paid out.
When a good company pays in shares, for compensation or an acquisition, it usually gives more than it gets.
It’s really surprised me that companies like Tesla haven’t been more aggressive about either issuing shares or making acquisitions. Before their stock price dropped 15% or so over the last week I did some rough math on if they bought a company like Stellantis for 100 billion euros and it was something like net income per-share would more than double with only 13% dilution.
I do think there is room for a Henry Singleton/Teledyne style value creation playbook when valuations truly get out of wack, but it’s surprised me I haven’t seen more aggressive equity issuance or share based acquisitions from companies like Tesla. For companies like Tesla given the large retail investor following I’m curious if additional equity issuance/sales would be more frowned upon by regulators.
I think Tesla did do some near the top of the market. Musk certainly sold several billion of his personal stake. AMC is an example of a company that really went to town on issuances.
I stopped by an AutoZone the other day since I needed to buy a new taillight assembly for my car and they told me to buy it off Amazon since I’d get it faster and that it would be cheaper as well. They were right it was 120 on Amazon versus 210 at AutoZone, but the delivery timeframe was about the same.
I think part of this is they don’t specialize as much in exterior body stuff like taillight assemblies, but I thought it was an interesting data point. The sample size is one customer transaction at one store so you can’t really draw conclusions, but it did get me wondering about the long-term threat from eCommerce on AutoZone and how this could potentially change their capital allocation strategy.
I’d say as an investor the more uncertainty there is about a companies potential future the more I prefer dividends and special dividends over buybacks as buybacks increase the percentage of the total return that is reliant on the terminal value of the business at the end of the holding period. For many of my midstream investments even if the terminal value of these assets is zero in 2050, I’ll have received so much cash from these assets it doesn’t matter a ton in my opinion.
On a related note I’d love to see a blog post with your thoughts on the midstream sector. The industry seems to be consolidating and there is an increased focus on capital returns with what seems like generally low valuations. There also seem to be barriers to entry in terms of the difficulty combined with a lack of desire for large greenfield pipeline projects combined with what appear to be a decent number of high ROIC incremental expansion opportunities available to many midstream companies.
I agree, if there's a terminal value question then dividends are the right move. Dan has written about some midstream companies in the past and they're certainly something we'll consider for the future.
Excellent point Adam.
That EBITDA is shown net of stock compensation is testament to the corporate influence on FASB accounting rules. These rules create cover for self dealing management teams to throw unsophisticated investors off the truth (or under the bus).
That said, Performance based restricted stock awards (RSU’s) should be designed to create incentives for high performing employees to stay. While senior management loves to abuse this by rewarding themselves even in times of mediocrity, RSU’s do encourage retention in the ranks.
From the employee perspective RSU’s are both a form of compensation but also a stake in the continued price appreciation of a companies stock. By nature of their restrictions they also creat a hurdle for competitors to lure away high performing employees and an incentive for low performers to jump to those same competitors.
The takeaway is when evaluating a company it is valuable to understand how stock awards are administered and not simply view them as a line item to adjust. Figuring out how this is administered may be as simple as asking or may be intentionally hidden by management to avoid scrutiny. Companies that use RSU’s to encourage performance and retention are more likely to provide more transparency given that information needs to be disseminated widely among employees to gain the greatest effect.
Brent, you make a good point that not all stock comp is created equal. I agree that it should be analyzed with nuance rather than as a single line item to adjust.
“so I don’t buy the idea that employees need to be paid in cash so that they feel they have skin in the game”. You meant paid in stocks?
Yes that was a typo. Thanks for catching it. I changed it in the article.
I don't get the point about Capital Leakage. If a company pays cash for comp, then it will be less cash to buyback stock. So, we will end up with same IRR?
When a company issues stock comp they estimate the forward returns of their shares to determine how much stock they should issue. If they assume lower forward returns than occur, they've issued more stock than intended. The charges against earnings were less than the value paid out.
When a good company pays in shares, for compensation or an acquisition, it usually gives more than it gets.
It’s really surprised me that companies like Tesla haven’t been more aggressive about either issuing shares or making acquisitions. Before their stock price dropped 15% or so over the last week I did some rough math on if they bought a company like Stellantis for 100 billion euros and it was something like net income per-share would more than double with only 13% dilution.
I do think there is room for a Henry Singleton/Teledyne style value creation playbook when valuations truly get out of wack, but it’s surprised me I haven’t seen more aggressive equity issuance or share based acquisitions from companies like Tesla. For companies like Tesla given the large retail investor following I’m curious if additional equity issuance/sales would be more frowned upon by regulators.
I think Tesla did do some near the top of the market. Musk certainly sold several billion of his personal stake. AMC is an example of a company that really went to town on issuances.