Since the 1990s, share buybacks have surpassed dividends as the primary way S&P 500 companies return cash. Ignoring buybacks provides an incomplete picture of a company's total shareholder return, as they now constitute roughly $0.60 of every dollar returned.

After a large, debt-funded acquisition, deleveraging should be the top priority over share buybacks. Choosing buybacks sends a mixed signal, disappoints investors expecting a return to the growth playbook, and leaves the company too financially constrained to pursue future strategic M&A opportunities.

TransDigm's playbook leverages sole-source proprietary positioning to radically raise prices, yielding high margins and PE-style cash extraction. However, excessive markups draw congressional and Pentagon scrutiny. In contrast, HEICO offers cost discounts of 30% to 50%, aligning incentives with airlines and avoiding antitrust intervention. TransDigm's aggressive posture risks regulatory pushback, highlighted by DOJ intervention blocking its proposed $960 million acquisition of Stellant Systems to protect component competition.

The "social contract" of paying a consistent dividend forces management to be disciplined with capital allocation. It creates a high bar for new investments and mergers, preventing value-destructive deals that a company with excess cash might otherwise pursue. This makes the dividend a powerful corporate governance tool.

TransDigm finances serial acquisitions with high leverage, running a net debt to EBITDA ratio around 5.8 to 6 times and net debt near $31 billion, generating shareholder IRR above 20%. In contrast, HEICO operates with a net leverage ratio of about 1.6 times and 11x interest coverage. While leverage amplifies TransDigm's equity returns, it reduces borrowing capacity during shocks, leaving it vulnerable to liquidity contractions compared to HEICO's conservative balance sheet.

Many serial acquirers judge performance on EBITDA or revenue, encouraging debt-fueled, dilutive growth. HEICO structures executive incentives around 10% annual growth across three simultaneous metrics: EBITDA, net income, and operating cash flow. Requiring all three to expand in lockstep prevents management from hitting bonus targets via accounting adjustments or over-leveraged M&A, ensuring capital allocation remains disciplined and genuinely accretive to equity holders.

Domino's has negative $4 billion in shareholder equity. This isn't from unprofitability but from systematically returning more cash to shareholders via debt-funded buybacks than it retains. This financial structure makes traditional metrics like Return on Equity (ROE) useless for analysis.

UK fund managers, needing cash to meet investor redemptions, pressure their portfolio companies to pay dividends. This ignores more accretive capital allocation strategies like share buybacks, contributing to persistent undervaluation across the market.

Forcing companies to pay a base dividend plus a variable special dividend based on excess cash flow is a more effective capital return policy. This structure, used by some O&G companies, instills discipline, avoids value-destructive buybacks at market peaks, and aligns payouts with business cyclicality.