Atria Group vs Phillip Morris
Altria Group (MO) spun off
Philp Morris (PM) in 2008 and the two have persued strikingly different asset
alllocation strategies since. PM has bought back 23% of their shares since 2008 while MO only bought back 5%.
As a result,
MO grew their EPS and Net Profit 61% and 52% respectively over the period. This contrasts to +33% and 0% for PM. Had PM invested the $28 billion that they used to buyback stock
at a 5.8% return, their 2015 Net Profit would have been $2.3 billion higher or
34% of what they achieved.
Company

MO

PM

INDUSTRY

TOBACCO

TOBACCO

MARKET CAP

LARGE CAP = $125 B

LARGE CAP = $157 B

P/E

23X

24x

YIELD

1.2%

4.0%

200815 CASH FLOW  DIVIDENDS

$ 5.0 B

$ 28.3 B

200815 STOCK BUYBACKS

$ 4.5 B

32.4 B

200815 CHANGE IN
SHARES O/S

5 %

23%

GROWTH OF EPS 20082015

+61% or +7.0% pa

+33% or +4.2% pa

GROWTH IN NET
PROFIT “

+52% or +6.2% pa

0% or 0.0% pa

REQ’D AFTER TAX % TO =
EPS GROWTH[1]

5.3%

5.8%

2015 NET PROFIT WOULD
HAVE BEEN

$278 M more or +3%

$2.3 B more or +34%

CORREL'N PRICE vs
ANN. % BUYBACK

.79

.21

It should be noted that both
companies that both companies had a –ve correlation between the annual
percentage of the stock that they bought and the price they paid. This is the exception to the rule.
Note on Executive Compensation: PM’s average executive compensation over the last 5 years was 57% more than MO’s or $64.2 million vs$ 40.8[2].
Cigna vs Aetna
Cigna Corporation (CI) and Aetna (AET) also show a contrast in asset allocation. CI bought only 5% of their stock back whereas AET reduced their float by 23%. AET spent $10.3 billion vs $3.9 for CI. As a result, CI grew their Net Profit and EPS at nearly the same rate (+14.4% pa vs 13.3%). AET on the other hand grew their EPS at twice the rate of their Net Profit (10.1% pa vs 5.1%).

Company

CI

AET

INDUSTRY

MEDICAL SRVCS

MEDICAL SRVCS

MARKET
CAP

LARGE CAP = $33 B

LARGE CAP = $40 B

P/E

14X

14x

YIE

0%

0.9%

200815
CASH FLOW  DIVIDENDS

$ 13.4 B

$ 18.6 B

200815
STOCK BUYBACKS

$ 3.9 B

$10.3 B

200815
CHANGE IN SHARES O/S

5 %

23%

GROWTH
OF EPS 20082015

+153% or +14.2% pa

+96% or +10.1% pa

GROWTH
IN NET PROFIT “

+139% or +13.3% pa

+41%
or +5.1% pa

REQ’D
AFTER TAX % TO = EPS GROWTH[3]

3.3%

9.1%

2015
NET PROFIT WOULD HAVE BEEN

$136 mil or 6% more

$1,046 mil or 38% more

CORREL'N:
PRICE vs ANN % BUYBACK

.63

.63

hand, grew their EPS at
Due in part to the fact that AET was smart about timing
their buybacks, as shown by the negative correlation between the annual percentage
amount that they bought and the price,
the Required Rate to equalize the Net
Profit growth to their EPS is quite high at 9.1%.
Had they had achieved that, they would have earned $1 billion
more in 2015 than they did. If they had
earned only a 6% return, for example, the increase in Net Profit would have
been $624 million more or 23% above what they
achieved.
Note on Executive Compensation: AET paid their executives an average of $42.2
over the last five years, which was 17% more than the $36 million that CI
executives were paid.[4]
Costco vs Target
Company

COST

TGT

INDUSTRY

RETAIL STORE

RETAIL STORE

MARKET
CAP

LARGE CAP = $68 B

LARGE CAP = $52 B

P/E

28X

16x

YIELD

1.2%

2.8%

200815
CASH FLOW  DIVIDENDS

$ 16.3 B

$ 36.4 B

200815
STOCK BUYBACKS

$ 2.7 B

$11.4 B

200815
CHANGE IN SHARES O/S

+1 %

20%

GROWTH
OF EPS 20082015

+82% or +9.0% pa

+64% or +7.3% pa

GROWTH
IN NET PROFIT “

+82% or +8.9% pa

+35%
or +4.3% pa

REQ’D
AFTER TAX % TO = EPS GROWTH[5]



5.0%

2015
NET PROFIT WOULD HAVE BEEN



$658 mil or 22% more

Had TGT invested the $11.4 billion instead and earned a
return of 5.0%, they would have earned close to $700 million more in 2015, or
22% more than they did.
Note on executive compensation:
Can you guess which of these two companies paid their executives more?
Target paid their top executives 120% more than Costco did over
5 years! The average was $47 million
compared to $22 million. In 2015 alone
the comparison was $60 to $24 million![6]
Hypothesis: Executive compensation is positively correlated to the spread between the growth of Earnings per Share and the growth of Net Profit.
(c) 2016 Robert L. Colby
[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
[3]
The required rate of return applied to the buyback funds to grow the Net Profit
at the same rate as the EPS.
[4]
Morningstar
[5]
The required rate of return applied to the buyback funds to grow the Net Profit
at the same rate as the EPS.
[6]
Morningstar