AutoZone: Creating or Destroying Value?

I'm highly skeptical about the economic value of most share-repurchase programs. To see why, look at the following graph of the total buyback dollar amount for the companies in the S&P 500, compared with the average price of the index on a quarterly basis:

Source: Standard & Poor's.

Source: Standard & Poor's.

Share buybacks for the S&P 500 accelerated in the second half of 2004, culminating in a sharp spike during the first two quarters of 2007 -- just as the stock market was peaking. Conversely, when stocks traded at bargain prices during the worst of the crisis, share buybacks dried up. Then, as stocks became more expensive during the rally that began in March 2009, companies once more became happy to step up the dollar amounts spent on share repurchases.

Still, not all buyback programs hurt shareholders. To praise smart capital allocators and shame those who fritter away shareholder capital, I've decided to track individual share-repurchase programs. Today, I'm looking at the new program established auto-parts retailer AutoZone (NYSE: AZO  ) .

How much, for how long?
AutoZone is raising its buyback authorization by $750 increase and is placing no restrictions on when it will buy shares, or in what amounts.

How cheap is the stock?
AutoZone's announcement doesn't specifically mention the share price as one of the factors that will determine its ability to spend its authorization. That's a shame, because the relationship between price paid and intrinsic value will determine whether the share repurchases are compounding or destroying shareholder wealth. Just how cheap (or expensive) are the shares right now? Based on its price-to-earnings ratio, AutoZone trades at the top of its peer group:


Forward P/E

O'Reilly Automotive (Nasdaq: ORLY  ) 17.3
AutoZone (NYSE: AZO  ) 14.0
Pep Boys (NYSE: PBY  ) 12.7
Advance Auto Parts (NYSE: AAP  ) 11.6
Asbury Automotive Group (NYSE: ABG  ) 9.1
Sonic Automotive (NYSE: SAH  ) 8.5

Source: Capital IQ, a division of Standard & Poor's.

Is this a smart use of shareholder capital?
AutoZone's price-to-earnings multiple is in the top quintile relative to the company's industry peers, to the companies in the S&P 500, and to its own five-year history. As such, the share-buyback program looks like a poor use of shareholder capital at these prices. The shares of Sonic Automotive and Asbury Automotive, on the other hand, look a lot more attractive. It's worth tracking both and you can do that with our free application, My Watchlist.

Fool contributor Alex Dumortier holds no position in any company mentioned. Check out his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of Asbury Automotive Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1562772, ~/Articles/ArticleHandler.aspx, 10/24/2016 7:08:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:02 PM
AAP $141.93 Up +0.63 +0.45%
Advance Auto Parts CAPS Rating: ****
ABG $53.10 Down -0.10 -0.19%
Asbury Automotive… CAPS Rating: ***
AZO $746.98 Up +0.71 +0.10%
AutoZone CAPS Rating: ***
ORLY $275.56 Up +1.68 +0.61%
O'Reilly Automotiv… CAPS Rating: ****
PBY.DL $0.00 Down +0.00 +0.00%
The Pep Boys CAPS Rating: **
SAH $18.25 Down -0.30 -1.62%
Sonic Automotive CAPS Rating: ***