Capital allocation, when done well, can turn an average business into an exceptional investment.
William Thorndike makes this case beautifully in The Outsiders. The eight chief executive officers profiled in the book differed in industry, personality and operating style, but shared an important trait: They viewed capital allocation as one of the CEO’s most important responsibilities. They bought back large amounts of stock when shares were cheap, issued shares when expensive and resisted pursuing growth simply for growth’s sake.
Over decades, these decisions can materially enhance shareholder returns.
Most people think of a CEO primarily as the public face and strategic driving force of a business. We think the best CEOs spend disproportionate time asking a different question: What is the highest-return use of the next dollar of corporate capital?
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Our favourite answer is usually reinvestment in the existing business. If a company can consistently reinvest incremental capital at returns of more than 20 per cent, shareholders should generally want management to retain as much capital as can productively be deployed.
The challenge is that many wonderful businesses simply don’t need much capital. They generate far more cash than they can sensibly reinvest.
Management can then pursue acquisitions, pay dividends, repurchase shares or accumulate cash. What we do not want is management “pushing on a string” - “diworsifying” outside its circle of competence or pursuing acquisitions simply because excess cash is available.
If attractive internal opportunities don’t exist, we would rather receive the money through dividends or, under the right circumstances, intelligently executed share repurchases.
The long-term return from a predictable business can be simplified as: dividend yield + earnings growth +/– change in valuation multiple.
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Imagine a company growing earnings at 10 per cent annually, paying a 3-per-cent dividend yield and trading today at 15x earnings. If 10 years from now, the market values it at 20x, multiple expansion contributes roughly another 3 per cent annually.
Expected return is therefore approximately: 3-per-cent dividend + 10-per-cent growth + 3-per-cent multiple expansion = 16 per cent.
But dividends have a disadvantage. Once paid, the capital leaves the company, may incur taxes and becomes our responsibility to reinvest.
What if management instead retained excess cash and waited patiently to repurchase stock only when the prospective return exceeded, say, 20 per cent?
This is where buybacks become powerful.
Copart Inc. CPRT-Q provides an interesting example. It operates the world’s largest vehicle salvage auction platform, has an unusually strong competitive position, carries essentially no financial debt and requires relatively little incremental capital compared with the cash it generates.
Historically, Copart has been remarkably selective about buybacks.
Prior to its large fiscal year 2026 repurchase program, Copart deployed approximately US$2.35-billion repurchasing stock. Those shares were acquired at an estimated average split-adjusted price of roughly US$3.43 a share and at an average valuation of approximately 21.7x earnings.
Today, the shares retired with that US$2.35-billion would be worth approximately US$23.45-billion - nearly a 10x multiple on capital and an estimated money-weighted annualized return of approximately 17.3 per cent.
The comparison with Copart’s underlying business performance is illuminating.
Over approximately the same 19-year period, Copart’s total net income compounded at roughly 14.5 per cent annually. Its split-adjusted stock price increased from approximately US$1.76 in August, 2007, to US$33.26 in August, 2026, an 18.9x increase, or approximately 16.7 per cent annually.
The business itself compounded earnings at approximately 14.5 per cent, while the stock compounded about 2.2 percentage points faster. That difference reflects, in part, share-count reduction from buybacks - which allowed earnings per share to grow faster than aggregate earnings - as well as some valuation-multiple expansion.
The power of that 2.2-per-cent annual advantage is easy to underestimate: $100,000 compounded at 14.5 per cent for 19 years grows to approximately $1.31-million. At 16.7 per cent, the same $100,000 grows to approximately $1.88-million. A seemingly modest 2.2 percentage-point improvement therefore creates roughly $571,000 of additional wealth, or about 44 per cent more ending value. Small differences in annual returns become very large differences in wealth when sustained for long periods.
More importantly, Copart’s historical buyback capital appears to have earned approximately 17.3 per cent annually, slightly better than the stock’s 16.7-per-cent overall price CAGR (compound annual growth rate). That supports an important conclusion: Copart generally repurchased its shares at better-than-average valuations.
And it did not mechanically buy stock every year. For long stretches, it did almost nothing. When valuation became sufficiently attractive, management acted aggressively.
That distinction matters.
A dividend policy says: We have excess cash, so we will return it.
An intelligent buyback policy says: We have excess cash, but we will only deploy it when the prospective return is compelling.
The latter requires patience, discipline and a willingness to look inactive for long periods.
The best capital allocators understand that every dollar has an opportunity cost. Sometimes the right decision is reinvestment. Sometimes it is an acquisition. Sometimes it is a dividend.
And occasionally, the best investment a great company can make is in itself.
The author, his family and his investment fund all own a position in Copart. His fund first bought shares in March, 2026, and currently has a 3-per-cent weighting in the stock.
Jason Del Vicario is portfolio manager with Hillside Wealth Management.