If you’re a dividend fan, you’ll love this action

A significant portion of returns on investment come from capital gains, or when the price of a stock rises. Dividends, typically paid quarterly from a company’s cash flow, are another preferred source of return for those seeking the security and stability of a periodic income stream.

Crocs (NASDAQ: CROX), the famous foam clog maker, does not pay a dividend, but it has made strong capital gains – and also seeks to satisfy investors with another shareholder-friendly approach: share buybacks.

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The advantage of a share buyback

Repurchase of its shares is a method that a company can use to, in effect, return excess cash to shareholders. It’s because reducing the number of shares in circulation increases the earnings per share (EPS) and also decreases the course / benefit (P / E). Share buybacks can be seen as a signal that management considers the company’s shares to be undervalued. Overall, it is generally viewed as positive by the market.

Shareholder-friendly program

In the first three quarters of this year, Crocs has already bought back $ 500 million of its stock – and at a Investor Day Last month, management announced a new $ 500 million fast-track share buyback program it plans to execute in the fourth quarter.

With a current market capitalization of $ 8.1 billion, this latest buyback plan equates to a 6.2% reduction in the number of shares outstanding. Essentially, investors get this “return” just because they own the stocks and don’t do anything. And this over a period of three months! Of course, the share price could still fluctuate depending on other factors.

By the end of this year, the company will still have around $ 1 billion in its share buyback program, CFO Anne Mehlman said during the Investor Day presentation. So expect the same shareholder-friendly capital allocation policy to continue in 2022.

Meanwhile, the business is doing well. In each of the first three quarters of this year, revenue growth accelerated compared to the same period last year. The company also has a gross margin of 61.7% and an operating margin of 30.5%, both of which are better than the shoe behemoths. Nike and Under protection.

This is a successful company and the share buyback program likely reflects management’s firm belief that the stock is undervalued today.

Crocs continues to invest for growth

At first, you might think that since Crocs is spending such a large amount of money to buy back stocks, it doesn’t have a lot of opportunities to invest. invest in growth initiatives. But that would be a false assumption.

Management intends to drive sales by focusing on four key growth drivers over the next five years: the digital channel, sandals, Asia, and product and marketing innovation. The goal is for these initiatives to bring annual revenues to $ 5 billion by 2026, more than double the $ 2.3 billion expected for this year.

What’s even more remarkable is that Crocs’ capital expenditure will only account for 3% of sales each year, meaning there will be tons of free cash flow to keep coming back to shareholders even afterwards. have invested for growth. Mehlman says, “We plan to continue to generate exceptional free cash flow equivalent to over $ 1 billion per year by 2026.”

This prospect is truly exceptional. The business has seen a resurgence fueled by a pandemic, with consumers emphasizing comfort above all else. Even die-hard fans of dividend-paying stocks can certainly find Crocs’ stock buyback program quite heartwarming.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Warren Dockery

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