Some thoughts on Dillards
I've really been racking my brain the past several months on just how much I like share buybacks. And to start off, I think I should say that I really, really like them.
A stock that caught my attention recently is Dillards (DDS). Dillards is nothing sexy, at all. Its a boring, decades-old department store, mostly run by the same family that founded it. Like other retailers, they struggled from 2008-2010, but have rebounded VERY nicely since. Operating income the year ended Jan 2010 landed at $157MM, but last year's operating income came in at $537MM. That's no joke.
What's even more impressive, to me, is that they reduced the number of diluted outstanding shares from 74MM to 49MM over that same time frame. And in the last 3 months, the share count has fallen to 45MM. Even though share prices are now comfortably in the 90s, the company still seems dedicated to share buybacks. And why not? With annual free cash flows of roughly $400M per year, the company is still reducing it's outstanding share count by 10% per year!
This afternoon, I just came across an article that seemed to actually criticize Dillard's for it's share buyback strategy over the past 4 years, and even more strongly toward it's latest buybacks - "Dillard's is playing a dangerous game." http://www.fool.com/investing/general/2013/11/18/dillards-is-playing-a-dangerous-game.aspx?source=ihpsitcag0000002&lidx=2#916420
The article seems to elude to the fact that the buyback strategy was simply a short-term boost to stock price, and that "luck is running out" and "shareholders are in for pain next year."
I realize that eventually, Dillards must begin to up its annual CapEx investments. But even if CapEx increases back to levels of depreciation, we're still talking about very healthy FCF numbers (assuming business operations and sales don't begin to deteriorate).
But why should business deteriorate? Despite closing a handful of under-performing stores over the past few years, Dillard's has actually increased it's top line (thank you Sears and JCP). I certainly don't think Dillard's is going to become the next Nordsrom or Macy's, but the numbers don't indicate this is anywhere near the next JCP, either.
As long as buybacks do a successful job at reducing share counts (unfortunately many buyback plans don't), and as long as the cash spent toward buybacks aren't fueled by debt (many buyback plans are), I think buybacks are an excellent way for companies to generate value to shareholders.
I the case of DDS, I can't fathom any possible scenario where the money spent on buybacks, if spent on CapEx instead, could have come close to boosting EPS the way the back back plan did. Odds are that the money spent on CapEx would have been a huge destruction to Dillards [relatively healthy] return on assets.
That being said, I realize that I may be wrong on the sustainability of Dillard's future as a successful retailer, but I don't believe I'm missing anything on the value of a good buyback plan. I think the managment of Dillard's performed one of the most spectacular acts of increasing shareholder value over the past 4 years.