There are four broad ways a corporation can increase its stock value: Internal Growth, Mergers and Acquisitions, Debt Reduction, and Share Reduction.

**Internal Growth** is the most fundamental and desirable path. A company’s other initiatives should generally meet a higher bar before being pursued.

**Mergers and Acquisitions** are often problematic. While they offer a fast route to growth, studies of large mergers throughout the 20th century show that most failed to deliver long-term benefits.

**Debt Reduction** offers two advantages: lowering interest expenses and potentially reducing corporate risk. Paying down short-term debt reduces risk most effectively, while reducing long-term debt saves more on interest. In some cases, doing neither may be the best strategy depending on the company’s financial position.

**Share Reduction** is one of the oldest methods of increasing shareholder value. Sellers receive slightly higher prices for their shares, while long-term holders benefit from owning a greater share of the company and its future profits. Henry Ford famously bought out early investors to become the sole owner of Ford Motor Company — eventually becoming the richest man in America. Decades later, Ford Motor went public again.

This concept is easier to illustrate than to explain. Consider this:

Ten years ago, 100 shares of AutoZone (AZO) cost $16,000. If AZO had paid dividends instead of repurchasing shares and you spent the cash, your shares would now be worth around $26,000. If you reinvested the post-tax dividends into AZO stock, you’d have about $40,600. In a retirement account, where reinvestments are tax-free, the value would rise to $47,000. But by consistently repurchasing its own shares, AZO helped those same shares grow to $125,000 today. This dramatic outperformance came from a company growing sales at less than 5% per year.

There’s a saying that Einstein called compound interest the “eighth wonder of the world.” In many ways, share reductions are a powerful form of compounding for shareholders.

Katz Family Financial