On February 1, 2012, portfolio manager, Mark Johnson, a portfolio Manager of Johnson & Associates, was reviewing his holdings for AutoZone, an auto part retailer store of aftermarket automotive parts and accessories in the United States. The auto retailer sales were split into two segments: Do-It-Yourself (DIY) and Do-It-For-ME (DIFM). AutoZone has performed well in maintaining stable stock prices and high return on invested capital. According to exhibit 1 in the book states, 11.5% of average annual return and a stock price of $348 since 1997, however; a noticeable shareholder, Edward Lampert, began liquidating his shares in the company. It’s an issue that can lead to questing among shareholders and potential investors. The decision by Lampert …show more content…
However the invested capital is not affected by repurchases since the it did not change the total equity. (cash is used to repurchase shares on the open market and record the purchase in the treasury stock account. This balances the equity recorded on the book.) ROIC is not affected by repurchases The company is generating more cash than it can reasonably invest in its business model, so the cash has to be distributed This is highly profitable company, it is generating a high level of cash flow. The company need change its operating strategy by investing more into new stores or expanding via acquisitions, or else the cash flow will have to be distributed to either debt holders or equity holders → paying a cash dividend, reducing debt, or investing more in the core business (financial strategy (dividends or debt) or operating strategy (investment in the business)) cash dividend is close alternative. shareholders will get their …show more content…
AutoZone also might want to repurchase the stock back because they believe that the price for them is too low and they think the prices for them should be higher. When a company repurchase back some of their shares they want to improve their financial ration. They can improve earnings per share, return on assets, and return on equity, and their price to earnings ratio. Earnings per share increase because the number of shares outstanding is reduced. Return on assets also increases because cash is considered an asset and the cash was used to repurchase the stock. There is less outstanding equity in the firm and it caused the return on equity to increase. It will also help the price to earning ration to go down, which means that it becomes less expensive investments. We believe that the best solution is for AutoZone to repurchase some of the stock because it can change the amount of stock it repurchases every year. One year it can repurchase a lot of stock back and then the next year it can repurchase just a little and it is more flexible than paying dividend. It is better than paying dividend because the dividend is expected to increase every year or to remain steady year to year. It might make the stockholders happy because they are getting more dividend but it is really bad for AutoZone if they would have to decrease the