We’ll abandon the site’s namesake for the day and talk about times when it makes sense to buy shares of stock in a company that does not pay any dividends to shareholders. Generally speaking, the best candidates for these types of purchases are companies that offer a higher earnings per share rate than what you’d get from buying a traditional dividend stock.
After all, if you see a non-dividend paying company growing at 7-8%, why not just purchase BP and enjoy the added benefits of a high dividend that can reinvested and boost your annual income? Sometimes, you have a situation like DirecTV or AutoZone where the company is growing at a high-single dit pace, but is repurchasing stock instead of paying out a dividend, and thus can offer shareholders a total return in the 11-15% annual range.
One company doing this that does not get a lot of attention is Bed, Bath, and Beyond. The company has an outstanding pedigree despite not getting a whole lot of attention from the investor community. From 2004 through 2014, Bed Bath & Beyond increased its profits from $500 to a little over $1.0 billion.
You’d naturally think, “Oh, okay, so the price should have doubled over the past ten years.” But instead of paying out a dividend, the company has been quietly reducing its share so that the profits that had to be divided between 294,000,000 pieces in 2004 now only have to be divided into 201,000,000 pieces in 2014. The company reduced the share count by 30%, creating a situation where Bed Bath & Beyond has a 17% earnings per share growth rate even though the business itself only doubled its total profits over the past ten years.
Imagine if Bed Bath & Beyond was only owned by three people, each with an equal stake in the company. Over the past decade, Bed Bath & Beyond did the equivalent of buying out one of the partners so that the profits earned by the company only have to be shared between the two remaining owners. Spotting these situations as early as possible is a lucrative endeavor, and there’s a place for it.
The catch, though, is that there is no floor on the price of the stock to alert people to the irrationality of the price. You’ll never see Coca-Cola or Johnson & Johnson yielding 10% absent Great Depression scenarios because somewhere along the line—maybe it is 6% or 7% yield—people would stop to say, “Hey, this stock price decline isn’t right, things are way too cheap here”, and you see a floor put on the price of the stock.
Bed Bath & Beyond doesn’t give you that kind of assurance—from 2007 into 2008, the price of the stock fell from $43 to $16 per share. A lot of people, and I would wager the vast majority of the investor community, couldn’t deal well with that kind of volatility, especially absent a dividend. That’s why stocks like this aren’t for everyone.
However, if you looked at the company’s fundamentals, you would see that Bed Bath & Beyond was growing profits from $425 million to $600 million throughout the financial crisis. The business was making more money than ever at the time, but the price of the stock was falling by more than half. Having cash on hand and the ability to study the financial statements to see the growing profits is definitely a recipe for fast-track wealth; could you imagine if you had bought shares of Bed Bath & Beyond at $16 per share? The company isn’t exactly high-risk; it grows profits per share in nine out of every ten years, and in the years when it doesn’t grow profits, it’s of the 2006-2007 variety when earnings per share went from $2.15 to $2.10 per share.
I think purchasing Bed Bath & Beyond stock makes a lot of sense once you have an income infrastructure in place—when you’re generating $1,000 or more per month above what you spend, and you also have something coming your way giving you cash to allocate. At that point, it makes a lot of sense to fit the Berkshire Hathaways, AutoZones, DirecTVs, and Bed Bath & Beyonds into your portfolio because they offer something that you may not get with all of your dividend stocks—a higher earnings per share growth rate.
Originally posted 2014-09-24 08:00:55.