Share Buybacks: The Quiet Ally of Dividend Growth

If you polled 100 different dividend investors on their opinion about share buybacks, I bet you’d get a multitude of different opinions.

Some think buybacks add zero additional value, that they’re basically money that’s fired off into the ether. That cash is gone, never to be heard from again.

I’d guess many would be somewhat in the middle. They recognize the value in a well-timed share buyback, but also realize that there are a lot of management teams that bungle the whole exercise. They do buybacks when shares are expensive, and then sit on their hands when the stock is cheap. Or, in other cases, the buyback is simply an exercise to minimize the impact of stock options. A 4% buyback is great, until the company almost negates it by issuing 3% more shares.

Your author, meanwhile, is a big fan. With one important caveat, that is. A buyback is only good if it’s done consistently over a long period of time. Pull that off, and it can be an incredible tailwind.

In today’s edition of the newsletter, I’m going to profile a few Canadian buyback kings, companies that have an impressive history of repurchasing shares. We’ll focus on how these buybacks really goose earnings on a per share basis, as well as the impact on a rising dividend.

What we’ll find is a good buyback is a massive positive for dividend growth.

Let’s see how.

Loblaw Companies Limited

Let’s start things off with Loblaw Companies (TSX:L), Canada’s largest grocer.

Loblaw doesn’t need much of an introduction. Between its various grocery banners and its Shoppers Drug Mart subsidiary, there’s likely a store within a 5-10 minute drive of virtually everyone reading this. Plus, its PC Optimum loyalty program is the best in Canada, currently boasting some 17M members. Nearly half of Canadians have a PC Optimum card in their wallet or the app on their phone.

And, of course, the stock has done this over the last decade.

But here’s the dirty little secret: Loblaw’s results aren’t really that impressive. What if I told you that, between 2014 and 2024, Loblaw only:

• Grew revenue by 31%

• Grew gross profits by 56%

• Grew operating income by 112%

Now don’t get me wrong. Those are decent numbers. But they’re not the kind of numbers that generate a 253% return excluding dividends. Total return is closer to the 400% mark if an investor would’ve reinvested those dividends.

Okay, so what happened? Why did the stock perform so much better than the underlying metrics? 

Enter the share buyback.

From 2015 through 2024, Loblaw consistently repurchased shares. Total shares outstanding decreased from 411.5M to 305M, for a decline of 26%.

This helped earnings on a per share basis explode higher. In fiscal 2015, Loblaw generated $1.42 per share in earnings, or about $600M in raw dollars. By 2024 that number grew to $6.99 per share, or just over $2.1B in raw dollars. Earnings were up a little over 200%, but earnings per share were nearly 400% higher.

Plus, this really helped the dividend. The dividend almost doubled on a per share basis between 2015 and 2024, growing from $1 per share to $1.99 per share. But the cash going out the door didn’t increase nearly as much. It went from $411M to $607M, for about a 50% increase.

Imperial Oil

Another company making terrific progress on the share repurchase front is Imperial Oil (TSX:IMO).

Imperial Oil is one of Canada’s largest oil producers, with its production capacity centered around Alberta’s oil sands. It also owns some pretty impressive downstream assets, including refineries in Alberta and Ontario, as well as a distribution network that delivers fuel to nearly 2,000 gas stations across Canada.

Imperial also has the sector’s best balance sheet, and is majority owned by Exxon (NYSE:XOM).

These guys have been gobbling up shares like crazy over the past nine years. Since 2016, when the share buyback begun in earnest, Imperial Oil has reduced the share count from 848M to 529M at the end of 2024. That’s a 38% reduction in the number of shares.

During that time, profits increased from $1.1B to $4.8B. But earnings on a per share basis did far better, increasing from $1.32 to $9.03.

But the real magic happens when we look at the dividend. From 2015 through 2024, Imperial Oil raised its payout each and every year. It increased the dividend from $0.54 per share in 2015 to 2024’s level of $2.40 per share. That’s an increase of 440% on a per share basis. 

But when we look at actual cash going out the door, a far better picture emerges. In 2015, Imperial Oil spent $457.7M on dividends. In 2024 it shelled out about $1.27B in dividends. That’s an increase of just over 177% on a total basis.

This phenomenon makes our dividends much more affordable then they first seem, which makes it easier for the company to continue its 25+ year streak of consecutive dividend increases. As dividend investors, we should love that.

Canadian Tire

Canadian Tire (TSX:CTC.A) is a relatively rare beast. It is making serious progress on a share buyback while also paying a pretty generous yield.

As it stands today, shares yield 4.4%. The company has also raised its dividend each year for at least the last decade.

Like with Loblaw, Canadian Tire’s top line results aren’t anything worth getting too excited over. Revenues were $12.3B in 2015. By 2024, they had increased to $16.4B. Earnings growth wasn’t super impressive either; the bottom line increased from $659M to $888M during that same period.

Now, enter the share buyback.

From 2015 through 2024, Canadian Tire hoovered up its own shares like they were popcorn at a movie theatre. Shares outstanding fell from 76.2M to 55.6M, or about 27%. This helped goose the bottom line on a per share basis, with EPS increasing from $8.61 to $15.92 per share.

It also helped on the dividend front. The company grew the payout from $2.15 to $7.03 per share, a massive 326% growth rate on a per share basis. But actual cash out the door grew at a much slower pace, increasing from $164M to $391M. That’s an increase of just 138%.

That’s the beauty of a good buyback in a nutshell.

The awesome math of share buybacks

Let me ask y’all a question.

How much does a stock’s earnings per share increase if it decreases shares outstanding by 10%?

Okay, now how about 15%? Or 25%?

Most people answer linearly. A 10% decrease would increase earnings by 10%. Ditto for a 15% decrease, and for a 25% decrease.

But they’re wrong.

A 10% decrease in shares outstanding increases earnings by 11%. A 15% decrease improves earnings by 17.8%. And a 25% decrease will boost the bottom line by 33%.

Combine that with steady earnings increases, and suddenly real magic starts to happen. It supercharges the compounding process, causing earnings to explode higher. And it makes dividend growth all the easier to achieve by decreasing shares outstanding.

It’s a really powerful combination that, when executed properly, can achieve wonderful results for investors. Dividend investors get their steadily higher payouts, while the buyback both gooses per share earnings and makes the dividend more and more affordable.

But because it happens so slowly, it often gets overlooked. Nobody wants to stick around for a whole decade while a company slowly gobbles up 2-3% of its shares each year. But you should. The result ends up being really impressive.

The bottom line

Share repurchases are simply compounding done in reverse. And, like a lot of other types of compounding, they start out pretty modest and then really pick up steam over time.

A fantastic share buyback combines three things:

1. Consistent effort done over a number of years

2. Shares repurchased at a reasonable price

3. And it’s combined with steadily increasing earnings

Put those three things together, and you get some good stuff.

Plus, they make dividend growth easier to accomplish. There are many examples of companies combining a good share buyback with just pretty good operating results to turn a decent investment into something special.

So even though we’re dividend investors, don’t sleep on buybacks. We should really enjoy them.

One more thing

Canadian Dividend Investing is a reader-supported newsletter that helps Canadian DIY investors pick great stocks, supercharge their retirement income, and ultimately retire richer.

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