Example of a Boring Company Rewarding Shareholders

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Some of the best long term investments are straight up boring.

These companies are not story stocks like TSLA sending cars to mars or Apple releasing the next generation smart phone or UBER distrusting the taxi industry. But they sure are great investments for those who are patient.

This business has excellent margins and management consistently rewards shareholders. This company has the ability to survive this crisis and continue to succeed.

AutoZone (AZO) operates 5,800 stores in the U.S. making it one of the largest retailers of auto parts and accessories. The typical store has about 8,000 square feet and every one is owned directly by AutoZone. Out of the $12 billion of annual sales around 80% is to individual DIY customers. This company has lived through many crisis over the last 30 years and has never had an annual decline in revenues.

The company is very profitable and generates lots of cash. Current free cash flow (FCF) (the cash left over after all operating expenses and business investment is paid) is around $1.5 billion and consistent FCF margins greater than 10%. This is the cash a company has to reward shareholders. The company has 4 options for this cash: pay down debt, share buyback, dividends and/or acquisitions.

Most company managers would make wasteful acquisitions to grow the business at any cost and justify ridiculous pay packages. However AZO management has been very smart over the last 30 years and rewards shareholders via buying back shares (it pays no dividend). Share buybacks have been in the news lately due to companies poor capital allocation decisions. All the companies in trouble today have used debt to buy back shares of their overvalued stock which has destroyed hundreds of billions of dollars of shareholder funds. A separate blog post will have to be done explaining the differences in more detail but for this companies discussion AZO buys back shares with cash generated from the business and does not require debt to fund the purchases.

AutoZone has such a great business that it does not take much capital to maintain its empire and very little capital for additional store locations. With the free cash flow available to buy back shares and managements excellent financial management the company will survive this crisis and continue to remove about 6% of shares from the market every year. Effectively current shareholders consistently receive a larger piece of the pie every year.

The fear of this crisis has led to short term volatility in the stock. Shares have bounced hard off the lows but shares are still reasonably priced based on fundamentals. Let me know what you think.


Qries

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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2 comments
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Sometimes the best investments are the least exciting. It is Buffett's approach. He doesnt go for exciting, it goes for money making.

That said, if you look at Tesla, as an example, over the last decade, it provided a great return to investors also.

The combination of the two is Wal-Mart in my opinion. A rather boring industry, retail, that is now transitioning at the expense of many. Wal-Mart embraced technology which is putting it in a new realm.

Exciting times ahead.

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Thanks for commenting.

I am a Tesla (TSLA) skeptic. I have no bet either way but I would not be surprised to see TSLA revealing accounting irregularities and becoming a huge story like Enron. Sure it is another investment opportunity that I missed but at the end of the day I invest in what I know and TSLA has too many unknowns for me.

It does look like Wal-Mart and Target are giving Amazon a run for their money. The combination of local stores and online ordering giving consumers the ultimate shopping choice seems like a winning combination.

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