In its 2022 first quarter (ended March 31), O'Reilly Automotive (ORLY 1.03%) spent $775 million on share repurchases. And from April 1 through April 27, the business bought back another $106 million worth of stock. These stock buybacks are a long-standing practice of the company and say a lot more about its operations than some investors might see on the surface.
Let's take a closer look at why investors should appreciate this successful retailer's capital-return policy.
O'Reilly is a cash machine
During the 10-year period from 2012 through 2021, O'Reilly repurchased a total of $18.4 billion worth of stock. For comparison's sake, the company's market cap as of this writing is $41.6 billion. This is clearly a huge cash outlay.
From a business perspective, the fact that O'Reilly is able to do this means that the company produces ample amounts of free cash flow (FCF). In the most recent quarter, the business generated $575 million in FCF on $3.3 billion of revenue. Producing cash is something the company has done for a long time.
Selling aftermarket automotive parts, what seems like an incredibly boring industry, is actually extremely lucrative. Because O'Reilly's suppliers are so fragmented and want to reach customers, it puts the company in an advantageous position as the middleman. And demand for customers is strong in both robust and weak economic times because people always need functioning vehicles.
As a result, O'Reilly's financial profile is superb, with a gross margin of 51.8% and operating margin of 20.3% in Q1. And even after reinvesting back into the business, primarily to open more stores (54 net new locations opened in the first quarter), there is plenty of cash to buy back shares. That is a true sign of a durable business that still has growth potential.
Stock buybacks benefit remaining shareholders
Management has remained consistent when it comes to the company's capital-allocation policy. Reinvesting in growth is the top priority. When cash is left over, it will go toward stock buybacks. I think the general investor base should view this positively.
Over the past decade, O'Reilly has shrunk its outstanding share count by nearly 50%. This is beneficial for remaining long-term-focused investors because it basically increases their ownership of the business. And a smaller share count boosts earnings per share, which can support a higher stock price over time.
Furthermore, buying back shares is favorable from a tax perspective. With dividends received, investors must pay income taxes. But if you decide to sell your shares in a company, a capital gains tax, which is generally lower than ordinary income taxes (for assets held longer than one year), will apply.
An investment in O'Reilly would've worked out nicely for investors historically. Over the past one-, three-, five-, and 10-year time frames, the stock has outperformed the S&P 500. I think a continuation of this trend is likely as we look ahead.