I am a big fan of Best Buy (NYSE: BBY). The company has boasted impressive returns on equity for the last decade (averaging more than 20%) and strong free cash flows (averaging 900M per year for the last decade). I believe these facts prove that management has been a capable steward of shareholder capital, as expansion into new countries and new retail formats has been accomplished without sacrificing these metrics, which are the underlying basis of company valuations.
The following charts show relevant metrics for the company. You’ll see that the recession led to decline in returns, but much less than would be expected for a company selling discretionary products in the midst of the deepest recession in recent history. I am somewhat concerned about the trend in the company’s cash conversion cycle, which has increased mainly as a result of an increase in receivables – hopefully we see this improve in coming quarters. Click for full size:
I think the clear takeaway is that the company is capably managed and performing better than expected for a company whose share price has fallen by 26% since early December. However, the company is not only managed by capable operators, it is managed also by individuals focused on increasing value for shareholders.
Let’s start with the basics. The company has paid regular dividends since 2003, returning $1.49B to shareholders via dividends. Not bad, but there’s more.
At the end of fiscal 2005, the company had 492M shares outstanding. Today? Just 394M, or 20% less. These share repurchases have returned another ~$5B to shareholders over the same period.
Between the dividends and share repurchases, the company has returned ~$6.5B to shareholders. This is a pretty impressive figure given the fact that over the same period the company had an average market capitalization of $25.68B. Compare this average market cap to today’s, which is just $12.59B, despite the company hitting peak revenues and book value, maintaining low debt and strong returns and free cash flows and the fact that several major competitors have disappeared over the period (suggesting the company’s pricing power should be, at the very least, relatively steady if not improved due to the decreased competition).
But wait, there’s even more.
This week, the company made the following announcement (emphasis added):
The board of directors of Best Buy Co., Inc. (NYSE:BBY) has authorized a new $5 billion share repurchase program. The new program terminates and replaces the Company’s prior $5.5 billion share repurchase program, which was announced on June 27, 2007 and had approximately $800 million of remaining authorization as of the first fiscal quarter of 2012 ended May 28, 2011. …
The Company’s board of directors also approved a 7 percent increase in the company’s quarterly cash dividend to 16 cents per common share. The change will be effective with the quarterly dividend which, if authorized, would be payable on October 25, 2011 to shareholders of record as of October 4, 2011.
At the current market cap, a $5 billion share repurchase reflects nearly 40% of the shares outstanding. One of two things will happen: either BBY’s share price will increase as the company starts repurchasing, or Mr. Market will give up 40% of the company for $5 billion, leaving remaining shareholders with significantly more concentrated holdings. Assuming 5-year historical averages continue (and remember, this period includes the Great Recession), the newly concentrated holdings would now be able to generate $3.80 per share in free cash flow per year (12% yield if share prices stay the same – scenario 2) and returns on equity that would easily exceed 30%. Obviously there are assumptions being made here, but even in my pessimistic models I see upside in BBY’s current price and I view this share repurchase as a potential value-unlocking catalyst.
What do you think of Best Buy?
Author Disclosure: Long BBY