Mohnish Pabrai on Uber Cannibals and the magic of shareholder buybacks

I am a huge fan of Mohnish Pabrai, a value investor whose YouTube content never fails to impress me. Mohnish is incredibly generous with his time and consistently provides valuable educational insights.

A year or two back he released a captivating 1 hr 45-minute presentation/Q&A with Boston College and Harvard Business School. In this session, he discussed the long-term value creation of companies that engage in persistent and aggressive shareholder buybacks, which he amusingly refers to as the "Uber Cannibals."

Mohnish presented several case studies, one of which is Apple, to demonstrate the astonishing impact of decades-long share buyback programs combined with consistent growth in net earnings and multiple expansion on total shareholder returns.

Mohnish presented several case studies, one of which is Apple, to demonstrate the astonishing lollapalooza effect of decades-long share buyback programs combined with consistent growth in net earnings and multiple expansion on total shareholder returns.

The key formula to watch out for is when a company benefits from consistent earnings growth (>10% CAGR), multiple expansion, and shareholder buybacks that account for at least 80% of outstanding shares on a net basis (e.g., considering dilution from the exercise of management stock options, etc.).

Mohnish's "Uber Cannibal Formula" is: Earnings Growth x (100/share % left) x Multiple Expansion.

For instance, NVR bought back a staggering 80% of its outstanding shares between 1994 and the end of 2021. During this period, net income increased from US$10 million to US$1,237 million (120x), the trailing twelve-month price-to-earnings (PE) multiple increased by 0.7x from 10.2 to 17.9, and the share price surged 1,074x from US$5.50 to US$5,909. From 1994 to 2005, NVR's stock price skyrocketed by 128-fold (55.3% annualized).

NVR was one of the first US housebuilders to recognize the risks associated with excessive land holdings. They structured their business to only retain the land required for building houses in the next few years and secured options to purchase land from owners beyond that timeframe. This enabled them to consistently return excess cash to shareholders during favorable market conditions.

I noticed that the other characteristics Mohnish emphasized in relation to the magic of this strategy closely align with some of the general concepts put forward by NZS Capital when searching for resilient, long-term-oriented businesses.

For example, in order to fully benefit from the buyback program, managers must limit shareholder dilution resulting from stock awards/options to around 1% of the total outstanding share count per year. The business must also remain stable, generate consistently growing earnings on an absolute basis, and prioritize reinvestment of profits over dividends. Additionally, management should take advantage of periods of depressed valuations to aggressively repurchase shares.

I found it interesting to learn that Tim Cook, while recognizing the value of shareholder buybacks, sought advice from Warren Buffett on capital allocation, dividends, and buybacks. Under Tim Cook's leadership, Apple has acquired over 23% of its share count in the past 5 years, even though its PE multiple has increased by 0.5x.

For those interested, Mohnish generously shared a list of 31 publicly listed companies that have repurchased at least 30% of their outstanding shares over the last 5 years (see below). Happy hunting!

-Komorebi