Home Depot (NYSE: HD) is the stock that keeps on giving. Ahead of its analyst meeting, and just in time for the holidays, the retailer announced a $15 billion share buyback.
For longtime owners of the stock, the announcement is nothing new. Under the last two CEOs, Home Depot has become perhaps the most prodigious buyback policy among all retailers in both length and in dollar figures. In the past decade, the company has repurchased more than $50 billion in shares, cutting the company's weighted average shares outstanding by one-third.
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Home Depot's capital allocation policy has been shareholder friendly, enough to double the increase in its market capitalization.
Home Depot's share buyback policy has juiced returns
To appreciate the depth of Home Depot's total capital-return policy, it's prudent to look at three separate returns. The first is market cap, the total value investors assign to the company's equity, and is calculated by number of shares multiplied by share price.
At first glance, it would appear there are two ways to increase the company's market cap -- increase the value per share or increase the number of shares. However, the second option often results in lower market capitalization, because increasing share counts dilute existing shareholders, which in turn will sell the stock. In the past decade, Home Depot has increased its market capitalization 330%.
The second return, the increase in share price, is the one most investors know, as it's the return most often quoted in the financial press. Per-share price increases are positively affected by share buybacks, because fewer shares result in a larger ownership position in the company with a larger claim to earnings, dividends, and cash flows.
A second reason is buying back shares is considered a sign management feels its stock is undervalued. Although the share count decreases, per-share prices generally increase post-buyback. As the preceding chart shows, the combination of market capitalization increases and share count decreases have combined to give Home Depot stock a price return of 521% during the past decade.
Ignore price return: Total return is the best for investors
Although share price return is the most quoted metric, there's a better one for long-term investors to consider: total return. In addition to capturing the market capitalization return and the increase/decrease in return from outstanding share decreases/increases, the total return includes added gains from distributions to shareholders, a.k.a. dividends.
Although total return with dividend income is not quoted often, it's a powerful source of wealth generation. Zacks Investment Research found that from 1926 to 2013, dividend income provided an annualized return of 4.3%, or 42.6% of total returns. And it's the total return that's the true increase in wealth (not including reinvested dividends) you'd have if you invested in Home Depot stock a decade ago.
As the chart shows, the total return for Home Depot is 706% as of the time of this writing, more than double the return of its market capitalization. Investors who ponied up $10,000 in Home Depot stock would see their original investment increase to $80,670. Look for Home Depot to look to continue to return cash back to shareholders in the form of buybacks and dividends, growing this total return.
Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool has the following options: short January 2018 $170 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.