On Friday afternoon, Costco Wholesale Corporation (NASDAQ:COST) announced that its Board of Directors had authorized a $4 billion share buyback to replace the expiring buyback authorization. The board also voted to raise the quarterly dividend from $0.355 to $0.40 beginning next month.
At first glance, this news might seem to imply that Costco shareholders are about to be richly rewarded. That was the first reaction Wall Street had, as Costco stock rose about 1% in after-hours trading on Friday. But the truth is this was a routine move that means very little for investors.
A buyback authorization is not a buyback
The key disclaimer in the recent announcement was that the expiring $4 billion buyback authorization had $2.5 billion remaining. This repurchase program had begun in April 2011, meaning in the last four years, Costco only spent about $1.5 billion on share buybacks.
This reinforces a key point that sometimes gets lost in the midst of investor enthusiasm about big repurchase announcements: There is a big difference between authorizing a buyback and actually repurchasing shares. Costco is under no obligation to buy back $4 billion of stock. Indeed, based on its recent track record, it seems very likely that some of this authorization will expire unused.
Buybacks are just offsetting stock awards
If anything, this buyback activity has been trending downward for the past few years. After spending approximately $615 million to repurchase stock in fiscal year 2012, Costco spent just $370 million on buybacks in fiscal year 2013 and fiscal year 2014, combined.
Even this overstates the actual significance of buybacks, because the company also has a fairly generous stock compensation program for its employees. A better way to assess the impact of share repurchases may be to look at the trend in Costco shares outstanding.
The purpose of share buybacks is to reduce the share count in order to increase earnings and boost the value of the remaining shares. However, as the chart above shows, while Costco reduced its share count significantly in the 2005 to 2009 period, its share count has not moved much since then.
Costco prefers special dividends anyway
Just because Costco has not been reducing its share count does not mean the company is not shareholder-friendly. A quick look at its total return performance shows that Costco has been a great stock to own.
In the past few years alone, Costco has returned billions of dollars in cash to investors. But it has not come through share buybacks or even -- for the most part -- regular dividends. Instead, Costco gave investors a big $7 special dividend in late 2012 and followed that up earlier this year with another $5 special dividend.
There is nothing wrong with choosing special dividends over other methods of returning capital to shareholders. It just means that investors need to recognize that even though the Costco board just authorized a $4 billion repurchase program, the company is not about to go and repurchase $4 billion in stock.
That said, having the authorization in place is a good idea in case Costco stock gets caught up in a big market sell-off in the next few years. The standing repurchase authorization gives its management team the ability to opportunistically buy back shares if they become cheap.