Corequity Valuations, July 3, 2016 commentary of Robert L. Colby: "Real Growth vs Growth Lite" [Rational comparison of returns generated by buybacks and reinvestment]

Forum Home Page [see Broadridge note below


The Shareholder Forum

Returns on Corporate Capital™

—- comparisons of company returns based on GAAP-defined performance measurements —-


produced according to defined methodology and specifications with data provided by

EDGAR Online, a division of Donnelley Financial Solutions,

from SEC records of each subject company’s audited statements


Forum reference:

Rational comparison of returns generated by buybacks and reinvestment


For subsequent references to the analysis below by an invited participant in the Forum's workshop to develop "metrics" for considering buyback proposals, see


Source: Corequity Valuations, July 3, 2016 commentary

Corequity Valuations

Corequity provides independent, institutional equity valuation research. The results are used to screen for the best and worst values out of over 500 equities on a continuous basis. We have accumulated a proprietary database of historical monthly valuation data. For a brief background...

Sunday, July 3, 2016

Real Growth vs Growth Lite

Our Net Profit Test: Comparing Buybacks to Investment shows that a company’s purchase of its own shares causes a single increase in EPS (as in simple interest) compared to compounding growth that results from investment.  This graph shows the annualized returns of the two asset allocation decisions over time.  The sinking annualized return on a buyback explain the relatively low level of return required to grow the Net Profit at the rate that the buybacks achieved due to the fewer number of shares.

(See “Net Profit Test: Comparing Buybacks to Investment” at

The sinking annualized return on a buyback explains the relatively low level of return required to grow the Net Profit at the same rate that a buyback achieves due to the fewer number of shares.

To illustrate the advantage of Investment over Buybacks, here are two very similar companies who couldn’t be further apart in their asset allocation choices.  The two are Cracker Barrel (CBRL) and Jack in the Box (JACK).  They are both mid-cap Restaurant companies trading at 19x earnings.

Company data as of May 31st







MID-CAP = $3.5 B

MID-CAP = $2.4 B








$1.27 bil

$1.23 bil


-$0.16 bil

-$1.20 bil




GROWTH OF EPS 2008-2015

+144% or +13.6% pa

+50% or +6.0% pa


+151% or +14.0% pa

-4% or -0.5% pa




CBRL’s Cash Flow from Operations less Dividends totaled $1.27 billion from 2008 and 2015.  Most of this was invested in its operations as indicated by its book value per share which grew from $4.15 to $22.45. As a result of this investment, their Net Profit growth equaled the growth in EPS over the 7 years (+14.0% vs +13.6%) as their shares outstanding increased slightly.

By contrast, JACK bought $1.2 billion of their own stock, reducing their shares outstanding by 37%. As a result their EPS grew by 6.0% pa entirely due to buybacks but their Net Profit actually declined by 3.7%, or -0.5% pa.

The Shareholders of JACK today would have been much better off had management invested those funds - as much as that may have made the Sharesellers happy.  The company would only have to earn a 4.8% return on those funds for the Net Profit to match the “growth” in EPS (the Net Profit Test).  That would have generated $64 million more in Net Profit in 2015 alone, or 56% more than they actually achieved ($178 million vs $115).

Much has been said about the role of share buybacks in executive stock options.  It is therefore interesting to note how much these two companies compensated their senior management.  In 2015, Jack in the Box led by $16.6 to $13.8 million.[2]  The five year average number is closer but JACK still wins: $9.9 to $9.6 million.  

In JACK’s case, management is clearly not being judged by the Net Profit Test.


© 2016 Robert L. Colby

June 23rd 2016


[1] The required rate of return applied to the buyback funds to grow the Net Profit at the same rate as the EPS.

[2] Morningstar


Posted by Corequity Valuations at 2:40 PM





Permission is granted to republish images of the graphs of Returns on Corporate Capital as presented on this website with their full statements of source and copyright information, or as otherwise specifically approved to satisfactorily describe the analysis and sources, and to respect the intellectual property rights of both the Shareholder Forum and its cited contributors of research.

Information requests and suggestions of research applications for Returns on Corporate Capital or variations of the analysis can be addressed to the Shareholder Forum at


The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material other than as specifically stated. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.