How stock buybacks boost growth

When investors consider the benefits of investing in stocks, they usually only consider the basic level of capital appreciation and dividend payouts. After all, it’s what’s largely covered in the mainstream financial media and talked about at the proverbial cocktail parties, with people bragging about their dividend yield or how high their stock has gone.

However, there is a less common third option that allows investors to invest their capital more effectively while benefiting from a more efficient tax structure. This method is not often discussed in the media or in social settings, as most investors do not really understand its benefits. Stock buybacks are the hidden gem of asset acquisition that Warren Buffett loves so much in his own company.

So investors will look through stocks such as Berkshire Hathaway Inc. NYSE: BRK.B, Autozone Inc. NYSE: AZOAnd also Domino’s Pizza Inc. NYSE: DPZ The real-time benefits of owning stock in a company that actively buys back its shares instead of paying dividends to its shareholders. But before we get into that, here’s why buybacks are better than dividends.

Stock Buybacks vs. Dividends: Which is Better?

Well, it depends. If an investor has already accumulated enough wealth that earning a dividend makes more sense, then, of course, the dividend wins. However, most investors are in the market to see their wealth grow, and that’s where it’s at Stock purchases take the cake

First, they are tax-friendly. When companies pay dividends, they do so through capital that has already been taxed, and then investors are required to pay a double tax on that income. This means that capital is leaving the company, indirectly reducing the enterprise value and potential returns where that capital is to be invested.

Buyback is taxed only once. They retain capital within the company and, therefore, its enterprise value. They also generate returns by tapping into the company’s underlying return on invested capital (ROIC) rates. For wealth compounding, choose buybacks over dividends.

Warren Buffett’s Berkshire Hathaway: Prime Example

As big as Berkshire Hathaway became Financial sectorWith a market capitalization of nearly $1 trillion, it pays no dividends. Warren Buffett has said that if he ever wanted to return excess cash to shareholders, he would do so by buying back Berkshire’s stock at prices he believed to be below intrinsic value; Otherwise, that cash will go into Treasury bonds.

The effect in stock performance can be seen immediately. The S&P 500 has delivered a 367% return since 2000, while Berkshire Hathaway’s stock has outperformed. This rate doubled at 766%By owning mostly low-beta stocks that—theoretically—should perform at or just below the S&P 500.

So why the show? Stock buybacks have allowed capital to stay within the company and compounded at an ROIC rate of up to 15.2%, according to Company financials. That’s nearly double the 8% average annual return for the S&P 500, which makes sense for Berkshire to see double the index’s performance.

Autozone stock’s chart makes a case for a buyback

Now, here’s an interesting way to look at stock buybacks and their benefits: While the S&P 500 has run 367% since 2000, AutoZone stock has had a A whopping 12,270% return to the shareholders. Here’s how the stock did it and how investors can use this information to find their next wealth compounder.

By continuously buying stock, AutoZone leveraged millions of dollars of capital into it ROIC rates up to 39.7% As of the last 12 months. This means the stock is compounded on its own like no other in the peer group or market, which explains the massive outperformance seen in the chart.

What’s more, analysts still think it could push for higher prices despite its huge runs; Citigroup reiterated AutoZone stock as a buy until December 2024. $3,900 price target Call for an increase of up to 16% on today’s prices.

Domino’s Pizza: A buffet buy and buybacks compounder

Recent 13-F filings show that Warren Buffett Initiated a position in Domino’s Pizza stockAnother example for investors to reiterate is the fact that companies that buy back stock tend to attract the best capital. Again, since its IPO in 2005, Domino’s Pizza stock has a A huge run of 3,470% to ten times the returns of the S&P 500.

This can be attributed to the constant buyback programs that tap into it The ROIC rate of the company is more than 61% As of the last 12 months. Perhaps this is why Buffett felt so eager to buy something for his company. This compounding effect has also spilled over into Wall Street, which some analysts see.

Loop Capital now has a Buy rating on Domino’s Pizza stock, where they previously had a Hold view, this time also a $559 price target to call for a 23.3% upside on the company to where it trades today.

Before you consider AutoZone, you may want to hear this.

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