Share Buybacks and Shareholder Value
I just read a very good article on the use of share buybacks by companies in order to boost earnings per share and as a result bring value to shareholders. Check out PeridotCapitalist.com’s Chad Brand’s piece on Share Buybacks.
In the blog post, he is refuting the critics of AutoZone’s (AZO) current reliance on share buybacks to boost shareholder value. Critics of this believe that such reliance on buybacks ignores the company’s actual financial and operating health and as a result is not a sustainable business model. Chad does a really good job refuting this and showing why exactly buy backs and earnings per share should be of utmost concern to a shareholder.
My take on this from his description of Autozone’s shift in business philosophy from its growth stages in 1991-1998 and its buyback focused philosophy from 1998 onward is that using cash to buy back shares rather than plowing it back into growth for growths sake might actually be a good idea for the shareholders of an established, profitable business. Anyone who’s taken basic microeconomics knows the law of diminishing marginal returns. After a while, more and more capital is needed for every percentage point of revenue growth. This is why growth stories don’t last forever.
But, a shrewd management team who cares about its shareholders can continue to buoy its stock performance through an aggressive buyback strategy. Sound like any of the holdings that I’ve talked about in the past? You guessed it! Southwest Airlines has committed to buying back almost a $1 billion worth of shares at just a time that the company’s growth seems to be ebbing a bit. Could this mark a shift in Southwest’s philosophy? Maybe not, given that management is still focused on adding revenue streams and hoping to beef up earnings, but it is encouraging to see that management is also willing to invest its capital to directly add shareholder value. I would hope that should they realize that the investment necessary to gain new revenue outstrip its ability to add to earnings per share through a buyback plan, that they will make the right choice for their shareholders.
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