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Why AutoZone Isn't Taking the Fast Lane to a Stock Split

Stocks in this article: AZO AAPL AAP

NEW YORK (TheStreet) -- AutoZone (AZO) was once on my list of high-priced stocks likely to split. Shares traded as high as $561.62 on Feb. 12. They have since corrected back to $532, its Wednesday close, up over 11% for the year to date.

I don't think it should split now, however. Although a split would bring the price down from its current level, it would also increase volatility in a company whose management is determined to increase earnings and whose largest shareholders hate volatility but love AutoZone's stock buybacks.

AutoZone is the leading retailer and distributor of automotive replacement parts and accessories in the United States. It doesn't pay a dividend, but it is proactive in growing the company's stock price. Most recently, the Board of Directors authorized the repurchase of an additional $750 million of the company's common stock as part of its ongoing share repurchase program.

Since 1998 AutoZone's Board has authorized nearly $15 billion in stock buybacks. That's impressive for a company whose market cap is only $17.3 billion, and it sends investors a positive message.

The company has increased its buyback program nearly every quarter the past 15 year because it generates more operating income than it needs to grow and maintain its business. That gives AutoZone plenty of free cash to continue purchasing its shares.

Doing this creates what I call a "stealth dividend" for shareholders. Share buybacks lift the stock price by lowering the number of shares outstanding.

So why split its stock?

The main benefit would be to reduce the share price below $100 so more retail investors and funds could afford to own AZO. This would take a stock split similar to what Apple (AAPL) did.

The downside of, for example, a 6-for-1 split is that with six times as many shares trading the volatility of AutoZone's stock would increase. Company management and investors, most of which are large institutions like Vanguard and Fidelity, aren't used to dealing with volatile daily trading.

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