AutoZone doesn't pay a dividend, but I think the stock is quite appealing.
The company's most recent earnings report was solid, the balance sheet is healthy, and shares trade at a reasonable valuation.
AutoZone is also a notorious buyer of its own stock, having retired half of its share count over the last decade.
The company performed exceptionally well during the last recession, as its business is fairly recession-proof.
Despite not paying a dividend, I am very interested in owning shares of AutoZone.
Outside of workplace retirement accounts, all of our investments are in dividend paying stocks. It is the dividends from our portfolio that will help pay expenses in retirement. Share prices will fluctuate over time, but companies that have extensive histories of dividend growth are likely to continue paying dividends because they have enduring products or services that are highly sought after even during a recession.
There are some recession-proof stocks, however, that don't offer dividends that I find to be appealing investments. Let's look at some reasons why AutoZone Inc. (NYSE:AZO), one of the largest retailers and distributors of automotive replacement parts, qualifies as a non-dividend paying company worth owning. Listed below are three reasons to consider buying shares of AutoZone today.
Reason #1: Quarterly Results Were Strong, Again
AutoZone reported fourth quarter of fiscal 2019 results on 9/24/2019. Revenue improved 12.1% to $4 billion, which was $58 million higher than expected by analysts. The company's diluted earnings per share improved more than 50% from the previous year to $22.59, topping estimates by $0.80. Same-store sales grew 3% for the quarter.
For the fiscal year, revenue grew 5.7% to $11.9 billion and earnings per share increased 30.1% to $63.43.
While some of this earnings growth can be attributed to share repurchase, net income was up 41.2% and 20.9%, respectively, for the quarter and fiscal year.
For the quarter, gross profit declined 20 bps mostly due to lower merchandize margins. For fiscal 2019, gross margins improved 50 bps to 53.7%, showing that AutoZone is seeing improvements in its business. Expenses as a percentage of sales declined 320 bps for the quarter and 210 bps for fiscal 2019.
AutoZone has seen certain products become subject to tariffs, but has managed to pass most of these costs along to consumer. The company said on the conference call that it hasn't seen tariffs negatively impact gross margins.
The fact that AutoZone grew on the top and bottom line is not unusual. On a year-over-year basis, AutoZone has increased earnings per share and revenue every quarter since at least the first quarter of 2015.
A company with this type of consistent growth has to have a leadership position in its industry and be well managed. AutoZone checks both boxes.
AutoZone is present in a wide number of markets and is expanding aggressively. The company added 124 new stores during the fiscal year, with 86 openings in the U.S. This gives the company a total store count of 6,411.
An expanding store count gives the company a large footprint, though AutoZone doesn't open new locations on a whim. The company opens in locations that it feels will contribute to growth, which is why AutoZone has only closed three stores and relocated 25 stores since 2015.
AutoZone continues to perform well, showing solid improvements in revenue and earnings. The company also maintains a leadership position through its vast network of stores and has shown it has a handle on expenses. And while the company doesn't pay a dividend, it does return significant capital to shareholders through one of the most aggressive share repurchase authorizations in the market.
Reason #2: Free Cash Flow Improvements Lead to Share Repurchases at Attractive Valuations
AutoZone is known by many investors to be a serial buyer of its own stock. Unlike some investors, I don't mind companies buying back its own stock as this makes each share that I own become slightly more valuable. While this is a good idea in theory, many companies, especially in the technology sector, use share buybacks to offset the increase in share count due to stock options or secondary offerings. Companies sometimes use buybacks just to maintain the status quo for the share count. Spending billions simply to keep the share count steady seems a waste of capital. Share buybacks also help prop up on earnings per share when net income isn't growing. A lower share count can help mask real issues with the company's business.
But this is not the case AutoZone. The company cut its share count in half between 2009 and 2018. In fact, the share count has gone down each and every year since implementing its share repurchase program in 1998. Since then, AutoZone has bought back $23.2 billion worth of its own stock.
Earnings per share have also increased every year over this same period of time as well, but not due entirely to financial engineering. AutoZone has simply been able to improve its profitability, with net income growing 114% over the last decade.
AutoZone's net profit margin has also improved every year for the last ten years as well, growing from 10% in 2010 to 12.5% last year.
AutoZone repurchased $692 million worth of its own stock at an average price of $1,091 during the fourth quarter and retired $2 billion of stock during the fiscal year. Considering the current share price is nearly $100 above this average price, it appears AutoZone has gotten a good value for its efforts.
Speaking of value, shares are still very attractively priced. Using the most recent share price of $1,178 and consensus estimates of $65 of earnings per share for fiscal 2020, AutoZone's stock trades with a forward price-to-earnings ratio of 18.1. Despite a 41% increase in share price since the start of the year, AutoZone's valuation is well below the S&P 500's multiple of 23.2x earnings.
AutoZone announced on 10/8/2019 that it was adding an additional $1.25 billion to its current share repurchase authorization for a total repurchase authorization for ~$1.75 billion, or slightly more than 6% of the current market capitalization.
The company can afford to continuously buy back its own stock because its balance sheet is in healthy shape.
AutoZone saw an increase in operating free cash flow for the most recent fiscal year while keeping capital expenditures relatively consistent, leading to improvements in free cash flow. For example, the company had $1.76 billion of free cash flow in fiscal 2019, a 10% improvement from the previous year.
AutoZone has proven very effective at increasing free cash flow over the long term as well. So much so that free cash flow totals for fiscal 2019 were double what they were five years ago.
And since the company doesn't pay a dividend, it can focus all of its capital returns on share buybacks.
These improvements allow AutoZone to continually fuel its share repurchases with free cash flow instead of debt. In fact, long-term debt has only increased $580 million since 2015, showing that the company is mindful of avoiding having to load up its balance sheet in order to retire shares.
Reason #3: Recession Performance - Growth During a Turbulent Time
AutoZone's industry is fairly recession-proof. As I wrote in a recent article on Genuine Parts Company (NYSE:GPC), the automotive aftermarket industry is highly fragmented, but lucrative business. The worldwide global market automotive aftermarket is estimated at $200 billion.
The average age of the car on the road in the U.S. has been and now stands at nearly 12 years. AutoZone, which operates primarily in the U.S., is in a prime position to capitalize on this given its wide reach of stores.
Another positive for the company, consumers often hold off on making large purchases when the economy is in a downturn. Since buying a car or truck is one of the largest purchases consumers make, new car sales often suffer during a recession. Consumers will likely instead try to keep their current vehicle running. To do so, replace parts and accessories will be in high demand.
Therefore, automotive aftermarket companies can be considered recession proof. AutoZone is a prime example of this. Listed below are the company's earnings per share results before, during and after the last recession.
- 2007 earnings per share: $8.53
- 2008 earnings per share: $10.04 (18% increase)
- 2009 earnings per share: $11.73 (17% increase)
- 2010 earnings per share: $14.97 (28% increase)
- 2011 earnings per share: $19.47 (30% increase)
Amazingly, AutoZone grew earnings per share at a high teen rate in both 2008 and 2009. Very few companies during this period of time demonstrated such strong growth. This growth rate helped shares gain 33% in value from the beginning of 2007 through the end of 2009. For context, the S&P 500 lost nearly 19% during this same period of time.
AutoZone also managed to reduce its share count by 24% during this period as it was one of the few companies still retiring its own stock during this recession.
Regardless of economic conditions, AutoZone has proven that it can grow its business. According to the company's annual reports dating back to 1997, AutoZone has seen gross profit improve each and year since 1995. There are likely very few companies in the market that can make such a claim.
While I am mostly interested in owning shares of companies that pay dividends, I find AutoZone's to be quite appealing.
AutoZone's most recent quarter showed improvements in revenue and earnings yet again, something followers of the stock won't find surprising. The company also opened many new stores that will only add to its results going forward.
The company's free cash flow allows it to fuel share buybacks without having to take on massive amounts of debt. And the share buybacks have resulted in the share count being cut in half over the last decade.
AutoZone proved to be quite resistant to the last recession, showing strong rates of growth during the depths of the Great Recession.
Shares also trade at a discount to the market multiple despite these factors.
Despite the company not paying a dividend, AutoZone has been added to my watch list. I consider the stock to be a buy at current levels.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.