Advance Auto Parts, Inc. (AAP), International Business Machines Corp. (IBM), McDonald’s Corporation (MCD): These Companies Grow Shareholder Value Better Than All Others

There are two primary ways companies grow value per share: (1) increasing the value of operations, and (2) decreasing the share count over time through repurchases at prices at or below intrinsic value. Companies that do either one of these tend to outperform the market over a long period of time. However, companies that increase the value of the business and decrease the share count tend to do the best.

Lucky for us, there is a small but growing contingent of growing companies that habitually lower shares outstanding by a significant amount over time. The three highlighted below are Advance Auto Parts, Inc. (NYSE:AAP), International Business Machines Corp. (NYSE:IBM), and McDonald’s Corporation (NYSE:MCD). Each company continues to lower its share count and has bright future prospects. As a result, investors may expect higher returns from these companies than their price-to-earnings ratios indicate.

Cannibals

The chart below shows the shares outstanding for each company over the last ten years. International Business Machines Corp. (NYSE:IBM) and McDonald’s Corporation (NYSE:MCD) are charted using the left axis, while Advance Auto Parts, Inc. (NYSE:AAP) is charted on the right axis.

All three companies have steadily repurchased shares regardless of price or market environment. Although this is not the most efficient, or even shareholder-friendly, method of share repurchases (shareholders would prefer them to purchase a large amount of shares only when the stock price is below intrinsic value) the repurchases average out to a net benefit to shareholders.

By the end of the decade, shareholders will own significantly more of these companies than they originally paid for. Even if McDonald’s Corporation (NYSE:MCD) stopped growing, value per share would still increase due to share repurchases. However, when combined with growth in the value of operations, share repurchases compound the increase in shareholder value.

Improving operations

The reason that constant share repurchases average out to a net benefit for each of these companies is that their operations are growing, not deteriorating. Although it is still possible that the shares are overvalued, the growth in the value of operations will eventually negate value-destroying repurchases.

Over the last decade, all three companies have grown free cash flow by a meaningful amount — and earnings by an even higher amount.

The exact amount of growth is not as important as the fact that the number is growing. Advance Auto Parts, Inc. (NYSE:AAP), International Business Machines Corp. (NYSE:IBM), and McDonald’s Corporation (NYSE:MCD) are all improving, not deteriorating.

Advance Auto Parts, Inc. (NYSE:AAP) is already the most efficient auto parts supplier in the do-it-yourself market, and it has significant growth opportunities in the commercial market.