Shareholder Value Created Through Buybacks: AmerisourceBergen

One company that stood out in our sample study for their effective use of share buybacks was AmerisourceBergen (ABC), one of the country’s largest pharmaceutical distribution and services companies. During the first 3 years of our study period ABC reported average annual free cash flow of $463 million compared to an average of $722 million for the last 3 years, representing a 56% increase. However, free cash flow per share grew by 144% over the period, from $1 to $2.44. How did this happen? Management used shareholder capital to reduce shares outstanding by 36%, from an average of 464 million shares at the beginning of the period to an average of 296 million shares at the end of the period. As a result, investors saw their percentage ownership—their claim on the company’s free cash flow and balance sheet—increase by 56% without purchasing even one additional share. Furthermore, from a price impact standpoint, we observe that over the period ABC paid an average of approximately $20 per share, well below the December 31, 2010 closing price of $34. By multiplying this $14 difference by the total reduction in shares outstanding of 177 million shares, we can calculate an approximate price impact of $2.5 billion over the 9 year period. This represents significant value creation for remaining shareholders, as it is equal to roughly 25% of ABC’s market value as of year-end 2010. From 2002 through 2010, management also paid over $300 million in dividends and reduced net debt by $1.6 billion. It is interesting to note that over the study period shareholders experienced a compound annual total return of 7.1% compared to 3.0% for the S&P 500. In our view, growing ownership in a growing business is a wonderful way to compound wealth, and we believe a key driver behind ABC’s outperformance over the period.