Assuming that you have a few large shareholders, whether they be insiders or institutions, once they amass an abnormally large percentage of the stock, they would likely take the company private or sell the entire firm.

Taking it private would be beneficial because 1) you would no longer have to hear certain people complain about the buyback strategy, and 2) you would not have to buyback stock to boost earnings per share, but rather you could just keep the cash flow for yourself. That is why private equity firms prefer high cash flow generating businesses.

If you wanted to move on to another venture, then you would most likely just sell the company outright, either to a private investment firm, or a competitor who would likely abandon the buyback strategy.

In either case, I don’t think shareholders ever get punished due to the buyback model. The value of their stakes is maximized due to the fact that capital allocation decisions are based on return on investment, not commonly accepted industry practices.

In AZO’s case, they probably have another 10-20 years before they reach the point of needing to reevaluate the buyback strategy, so from that standpoint, the model is sustainable for decades, just not forever, as you correctly point out. I think the naysayers on the whole concept make it seem like you can do buybacks for a year or two but that’s it, which is clearly incorrect.

In fact, the company in recent quarters has accelerated that plan by issuing debt to buyback shares since they were very underleveraged. In fact, AMGN just issued $4B in debt securities, of which $3B will be used for buybacks.

Given their recent troubles within the anemia drug franchise, expect buybacks to play a major role in trying to keep earnings per share from taking a large hit due to lost Aranesp sales. That is a key reason why I believe the earnings hit AMGN will see will be less than many panic sellers of the stock expect.

Do you think it would work for AMGN?