Lowe's (LOW -0.04%) and Murphy USA (MUSA 0.19%) prove that stocks can be somewhat boring but still produce multibagger returns on a long-term basis. Over the past decade, the home-improvement giant managed a 395% total return while the convenience store chain managed an even more impressive 780% total return. Compare that to the S&P 500's 205% return over the same timeframe.
Those total returns are even more impressive when you consider that Lowe's and Murphy USA have only seen sales growth of 77% and 25%, respectively, since 2013.
So how exactly did these two bedrock retailing stocks deliver this outperformance? And more importantly, will it continue? Let's dive in.
1. Lowe's: Shares outstanding are down 44% since 2013
Lowe's, with its duopoly in the home improvement market alongside Home Depot, is a great example of how stock buybacks can generate outsized shareholder returns when executed well. Lowe's has reduced its share count by 44% over the last decade, buoyed by an average annual free cash flow (FCF) of $5 billion.
The following chart shows the difference between FCF and FCF-per-share growth over the last decade, highlighting why these buybacks are so potent.
LOW free cash flow data by YCharts.
This juiced FCF-per-share growth is why Lowe's has easily outpaced the S&P 500 index over the last five and 10 years.
And this outperformance due to buybacks does not seem to be a one-off incident. An S&P Global study from 2020 analyzed the 100 most buyback-heavy stocks in the S&P 500, called the S&P 500 Buyback Index. This buyback-focused index beat the S&P 500 Index in total returns by 5.5% annually from 2000 to 2020, a historical pattern of outperformance.
Despite spending heavily on share buybacks, Lowe's still managed to extend its 59-year streak of increasing its dividend annually. Over the past five years, it has boosted its payouts by an average of 20% annually. Its rapidly lowering share count resulted in the dividend rising by 600% since 2013, while the total amount spent on dividends increased by only 255%.
At its 2022 investor day, Lowe's management estimated the company would generate around $26 billion in FCF over the next three years, which it expects to return to shareholders through continued share repurchases and increased dividends. Lowe's could quickly drop its share count by another 10% to 15% over this time frame.
Same-store sales declined 2% in its most recent quarter as consumers hesitated to make big-ticket purchases, but its persistent cash generation -- even through the Great Recession -- highlights its resiliency in awful times. If trying times are coming, look for Lowe's to continue gobbling up shares at today's reasonable valuation of 17 times FCF -- further proof of what makes it a premier bedrock stock to buy and hold forever.
2. Murphy USA: Shares outstanding are down 54% since 2013
Murphy USA used the success of its 1,700 convenience stores to repurchase more than half of its outstanding shares since its spinoff from Murphy Oil in 2013. More than half of its stores are adjacent to Walmart stores, thanks to a now-defunct partnership, and Murphy USA is in the midst of a transformation away from fuel-focused kiosks to large-format stores with more food and beverage choices.
Despite this ongoing transformation, Murphy USA is firing on all cylinders, growing FCF by 150% over the last decade. And its incredible pace of buying back shares has more than quintupled its FCF per share.
MUSA free cash flow data by YCharts.
As impressive as these returns are, Murphy's brightest days might still be ahead. Single-store operators account for 60% of the convenience store industry in the United States, so there is an incredible amount of room remaining for consolidation over the long haul. These single-store operators cannot compete with the likes of 7-Eleven, Casey's General Stores, or Murphy USA due to their massive supply chains that allow them to offer some of the lowest-priced gasoline possible.
Management expects to add 40 to 50 new stores annually while razing and rebuilding another 20 to 30 each year, awakening what was previously a relatively sleepy operation. It has also acquired 150 QuickChek stores, with their large-format food and beverage layouts, and aims to integrate that company's higher-margin goods into some of its existing stores and upcoming builds.
At 16 times FCF, the stock is trading slightly above its five-year averages but is reasonably priced considering its buyback track record and remaining growth runway. The company also started paying a dividend yielding 0.4% in 2020 and has raised its payouts for six consecutive quarters.
Murphy USA provides motorists with an essential service -- refueling -- and is even adding electric vehicle chargers in some locations. Its returns to shareholders, growth prospects, and consistently cheap valuation make it a perfect compounder to hold forever.
