A significant portion of investment returns comes from capital gains, or when the price of a stock rises. Dividends, usually paid out quarterly from a company's cash pile, are another favored source of returns for those seeking the security and stability of a periodic stream of income.
Crocs (CROX -0.52%), the famous maker of foam clogs, doesn't pay a dividend, but it has had strong capital gains -- and also seeks to satisfy investors through yet another shareholder-friendly approach: stock repurchases.
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The advantage of a stock buyback
Repurchasing its shares is a method a company can use to, in effect, return excess cash to shareholders. That's because reducing the number of outstanding shares increases the earnings per share (EPS) and also decreases the price-to-earnings (P/E). Share repurchases can be seen as a signal that management views the company's stock as being undervalued. All in all, it is generally viewed as a positive by the market.
Shareholder-friendly program
Through the first three quarters of this year, Crocs has already repurchased $500 million of its stock -- and at an investor day last month, management announced a new, accelerated share repurchase program of $500 million that they plan to execute in the fourth quarter.
With a current market capitalization of $8.1 billion, this latest repurchase plan equates to a 6.2% reduction in the outstanding share count. Essentially, investors are getting that "yield" just for holding the stock and doing nothing. And this is over a three-month period! Of course, the stock price could still fluctuate based on other factors.
At the end of this year, the company will still have approximately $1 billion left in its share repurchase program, CFO Anne Mehlman said during the investor day presentation. So expect the same shareholder-friendly capital allocation policy to continue into 2022.
Meanwhile, the business is doing well. In each of the first three quarters of this year, revenue growth has accelerated over the same period last year. The company also boasts a gross margin of 61.7% and an operating margin of 30.5%, which are both better than footwear juggernauts Nike and Under Armour.
This is a business that is thriving, and the stock buyback program likely reflects management's firm belief that the stock is undervalued today.
Crocs is still investing for growth
You might initially think that because Crocs is spending such a substantial amount to repurchase shares, it doesn't have many opportunities to invest in growth initiatives. But that would be a wrong assumption.
Management is intent on boosting sales by focusing on four key growth levers over the next five years -- digital channel, sandals, Asia, and product and marketing innovation. The goal is for these initiatives to push annual revenue to $5 billion by 2026, more than double the $2.3 billion expected for this year.
What's even more remarkable is that Crocs' capital expenditures will only represent 3% of sales each year, meaning there will be tons of free cash flow available to continue returning to shareholders even after investing for growth. Says Mehlman: "We expect to continue to generate exceptional free cash flow equating to over $1 billion annually by 2026."
This outlook is truly exceptional. The business has experienced a pandemic-fueled resurgence as consumers emphasize comfort over anything else. Even die-hard dividend stock fans can certainly find Crocs' share repurchase program quite comforting.
