Impact of Consistent Buybacks on Stock Price

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Stock buybacks are generally not beneficial to most investors.Many studies have shown that companies that buy their own stock do not perform well in the long run. Buybacks are mainly an accounting trick to manipulate stocks prices. When companies engage in buybacks their timing is usually bad too. For example, just before crash due to the global financial crisis, buybacks by U.S. firms reached record highs.

In some instances, buybacks can be successful in terms of propelling stock prices higher and higher not just in the short-term but in the long-term as well. US-based auto-parts retailer Autozone(AZO) is a perfect example of this scenario.

Autozone’s stock price closed at $673.62 on Friday and the company has market capitalization of $21.0 billion. The shares outstanding stands at just over 31 million. According to an article in The Wall Street recently, the company has been consistently buying its own shares since 1998.

The following chart shows Autozone’s stock price over the past 10 years and all-time:

Click to enlarge

10-year return chart:

AZO 10 Years

All-time return chart:

AZO All Years

Source: Google Finance

In the past 10 years, AZO is up by an astonishing 643% relative to S&P’s rise of just 77%. The difference in the long-term returns are even more fabulous as shown in the chart above.

Here are few more interesting facts from the Journal piece:

  • Since 1998 Autozone has reduced its share count by four-fifths.
  • An original investment at the time of Autzone’s IPO would have now grown by more than 93 times.
  • Autozone’s stock has become expensive as the P/E ratio has grown 12.52 in 2011 to 17.7 now.
  • The firm has reduced its shares outstanding by a net of nearly 10% annually.

Source: Buybacks Alone Won’t Fuel AutoZone, The Wall Street Journal, May 25, 2015.

The impact of all the buybacks are reflected in the share price as it has consistently grown over the years. The key takeaway is that buybacks can work in rare cases such as this one. It should not be noted that Autozone does not pay a dividend. So investors are purely betting on capital appreciation. Hence the stock may not be suitable for income investors.

In addition, Autozone operates in a consumer staples-type industry since auto-parts are a stable business during economic expansions and contractions. During recessions consumers tend to maintain their existing automobiles by buying parts as opposed to buying new cars. Hence auto-parts benefit from this trend.

Disclosure: No Positions

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A Post On Americans’ Obsession With Pets

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The U.S. is probably the only country in the world to be home to millions of pet animals. Americans keep all kinds of animals as pets with dogs and cats topping the list. Similar to expenses involved in raising a child, Americans spend billions of dollars for their pets. According to a recent article in The Wall Street Journal spent an astonishing $30.4 billion on pets in 2014. In addition to food and other items, Americans also spent another $28.0 billion on veterinary care in 2011. 56% of U.S. households own a pet.

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US Pet Industry

Source: Americans Show Their Pets Love to the Tune of $30.4 Billion, The Wall Street Journal, May 27, 2015

In some ways, high pet ownership in the U.S. can seem strange since more than 50% of households earn less than $50,000 per year. However other factors such as the need for companionship, unconditional love, etc. override financial concerns leading to pet ownership. A quick Google search on this topic brought up the question “Why are Americans so obsessed with pets?” by a foreigner in Quora. Here is a comment made by an anonymous user:

Christ, excuse all of the jack-offs in here…..if it hasn’t been made by the comments posted so far here: Ego. Americans love their ego, especially folks on the East Coast. “I’m so great, our pets are so great, my place is the best, my people are the best, because we’re the best and the toughest”…Jesus. No logic, facts or scientific merit whatsoever. Many people in many countries around the world can afford pets. Do they have a ridiculously heinous pet culture like America does? No. Do they have better educational systems? Of course. American public schools create internet trolls, trailer trash, submissive consumerism, incompetent politicians, an unhealthy obsession with material goods and pets, status symbols, SUV-driving soccer moms, and some of the largest consumer debt in any nation’s history. Not too bright, folks. Not too bright at all. And apparently, despite all of this “buying unconditional love” bull, an estimated 1 in 10 US adults report depression. That’s 3.3 million depressed adults, in this land of plenty. Don’t get me wrong, I love this country and the freedoms we used to have, but we have a strange culture. Maybe I’m not supposed to understand it, I don’t know.

“The United States most closely resembles a huge, poorly thought-out, sick…joke.” ~ George Carlin (2005)

Going back to the Journal article, some of the companies that cater to the pet industry include: Clorox (CLX), Church & Dwight (CHD) and Nestle (NSRGY).

Disclosure: No Positions

Zoo Animal

Investors Can Consider Adding Australian Bank Stocks After Recent Slide

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Australian bank stocks have fallen recently due to various reasons. Income investors looking to hold these stocks for five years or more can consider adding them at current levels. From a Bloomberg article:

After losing A$57 billion ($44 billion) in market value, Australian bank stocks are starting to look more like, well, bank stocks.

Valuations on a gauge of the nation’s lenders are near the cheapest relative to the global average since January 2013. Just two months ago, they traded at the biggest premium since Bloomberg began compiling the data in 2005. The shares that led Australia’s six-year rally have slumped amid concern about heftier capital requirements, driving multiples on Commonwealth Bank of Australia and its three main peers in May to the lowest this year.

The four Australian banks trading on the US markets declined by 19% or more from their peaks since last year:

S.No.BankStock price High since 2014Stock price as of May 26, 2015Change from HighDividend Yield as of May 26, 2015
1Westpac Banking Corp (WBK)$33.25$25.75-29.1%5.8%
2National Australia Bank Limited (NABZY)$16.57$13.16-25.9%6.1%
3Australia and New Zealand Banking Group Ltd (ANZBY)$32.55$25.11-29.6%5.8%
4Commonwealth Bank of Australia (CMWAY$77.88$65.04-19.7%5.2%

Compared to U.S. banks, Aussie banks have excellent dividend yields as shown in the table above. The Bloomberg article noted:

The S&P/ASX 200 Index has the highest forecast dividend yield among the world’s largest markets, data compiled by Bloomberg show. The 4.7 percent rate doesn’t include a tax advantage known as franking credits that boosts returns for domestic investors. The four largest lenders are all estimated to make payouts that top that level.

Source: Australian Banks Look a Lot More Like Bank Stocks After Drop, Bloomberg, May 26, 2015

Unlike most other countries, Australia does not impose dividend withhold taxes for U.S investors.This is one solid reason to include Australian banks in a diversified portfolio.

Tickers of banks mentioned: 

  • Westpac Banking Corporation (WBK)
  • National Australia Bank Limited (NABZY)
  • Commonwealth Bank of Australia (CMWAY)
  • Australia & New Zealand Banking Group Limited (ANZBY)

Disclosure: Long WBK and NABZY

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US Bank Stocks Are Cheap Based on Long-Term Valuation

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Many years have passed since the global financial crisis(GFC) of 2008-09. Fresh with memory of the collapse of many financial institutions, investors are still avoiding bank stocks like rotten fish.However that need not be the case. Of the thousands of banks operating the U.S. the majority are conservative well-run institutions. Even the ones that were saddled with losses have cleaned up their balance sheets, recapitalized and are back to growing profitably.

According to an article by Lisa Haakman in the latest edition of PSG Assessment Management’s Angles & Perspectives, First Quarter 2015, U.S. banks are trading at 70-years lows based on valuation relative to the S&P 500.

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US Banks vs SP500 Valuation since 1941

Over the past 10-years, US and UK banks have also under-performed the MSCI Index by 50% and 69% respectively as shown below:

MSCI vs US and UK banks Performance

Some of the reasons to invest in bank stocks include:

  1. Banks are the pillars of the U.S. economy. As the economy improves banks tend to be the main beneficiaries of higher economic activity.
  2. The U.S. economic recovery is well underway with the latest unemployment rate at just 5.4%.
  3. The real estate market is also recovering with some markets like San Diego, San Francisco and others already becoming sellers markets with bidding wars occurring often according to a report in the WSJ.
  4. Auto-lending is also on the rise.
  5. Credit-card lending is growing strongly with issuers competing with each other to grow their card portfolios by offering excellent rewards and other programs to cardholders.Millions of new card offers are also stuffed in American mailboxes on a monthly basis.
  6. Rising interest rates will actually benefit banks as they will be able to lend excess deposits at higher rates leading to higher profits.

U.S. banks are generating higher earnings and delivering higher returns to shareholders especially in the form of dividends and share buybacks. The following table shows the current payout ratios of three large U.S. banks:

Payout ratio US Banks

Source: Angles & Perspectives, First Quarter 2015,  PSG Assessment Management

Three large and seven community US banks listed below with their current dividend yields for further research:

1.Company: JPMorgan Chase & Co. (JPM)
Current Dividend Yield: 2.41%

2.Company: Wells Fargo & Company (WFC)
Current Dividend Yield: 2.68%

3.Company: Capital One Financial Corporation (COF)
Current Dividend Yield: 1.88%

4.Company: Bank of the Ozarks, Inc. (OZRK)
Current Dividend Yield: 1.24%

5.Company: Glacier Bancorp, Inc. (GBCI)
Current Dividend Yield: 2.57%

6.Company: U.S. Bancorp (USB)
Current Dividend Yield: 2.25%

7.Company: Cullen/Frost Bankers, Inc. (CFR)
Current Dividend Yield: 2.73%

8.Company: Bank of Hawaii Corporation (BOH)
Current Dividend Yield: 2.84%

9.Company: Commerce Bancshares, Inc. (CBSH)
Current Dividend Yield: 2.03%

10.Company: Mercantile Bank Corp. (MBWM)
Current Dividend Yield: 2.80%

Note: Dividend yields noted above are as of May 22, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

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Disclosure: Long GBCI, USB