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.
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
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:
Advance Auto Parts
Asbury Automotive Group
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.