Creating shareholder value via share buybacks
As discussed in earlier parts of this series, Lowe’s (LOW) has consistently grown sales and boosted its profitability in the last few years. The company’s performance has also been helped by the economic upswing in the US (SPY), which tends to benefit cyclical stocks like Lowe’s. Rising profitability is part of the reason the retailer’s return metrics like return on assets, return on invested capital, and return on equity have steadily risen in the past three years.
Besides margins enhancements, Lowe’s has also employed both leverage and share buybacks to improve returns to shareholders. The company has looked to deploy excess cash after financing growth initiatives and paying out dividends to buy back its shares. Repurchased shares are retired shares.
Lowe’s spent $3.9 billion on share buybacks in fiscal 2015. The company repurchased ~74.7 million shares, representing ~7% of the company’s diluted weighted average share count at the start of the year.
Return on equity boost
A lower share count and equity base have provided upside to the company’s return on equity (or ROE) and boosted earnings per share (or EPS). ROE has more than doubled from 10.6% in fiscal 2012 to 24.6% in fiscal 2015. EPS also, as a consequence, has grown faster than both revenue and net income.
Rival Home Depot (HD) has been even more proactive in making share repurchases (PKW) and the use of leverage. Its ROE has almost tripled, rising from 21.1% in fiscal 2012 to 58.1% in fiscal 2015. HD clocked ROE of 78% in fiscal 3Q16 compared to 13.6% for Restoration Hardware (RH), 29.9% for Bed Bath & Beyond (BBBY), and 28.1% for Williams-Sonoma (WSM). However, the leverage employed in the capital structure by both HD and Lowe’s is also higher than for these firms.
In the current fiscal year, Lowe’s plans to repurchase shares worth $3.8 billion. In the first three quarters of the year, Lowe’s has purchased 45.9 million shares for ~$3.3 billion.