Firms with strong, durable businesses and cheap stock prices can create substantial value for their shareholders. Companies that bet big on their own own shares can generate immense amounts of value for their longer-term shareholders. Three such companies, Sirius XM (NASDAQ: SIRI ) , Yahoo! (NASDAQ: YHOO ) and Viacom (NASDAQ: VIAB ) are conducting large share repurchasing programs as their stock prices are relatively inexpensive. As a result, these companies should see stellar long-term earnings-per-share growth as their outstanding share counts are reduced substantially.
Management betting heavily on a company's future generally tends to be a good sign for outside shareholders. Famous investors like Warren Buffett, John Malone, and Henry Singleton have all been major proponents of share repurchases as profiled in the book, The Outsiders, by William Thorndike (a fantastic book and a recommendation by the Oracle of Omaha).
Yahoo! is delivering value through capital returns
Yahoo! has seen its monthly traffic increase to more than 800 million users -- including 430 million users from mobile devices -- but the company's revenue growth from advertising hasn't kept up and has been on the decline. Yahoo has a $5 billion share repurchase authorization in place of which the company utilized $450 million in the last quarter. Based on the current market cap of the company, Yahoo! will be buying back a little more than 13% of itself through its share buyback program.
Analysts and investors widely expect the company to see more improvements on the monetization front after bringing back user growth. In addition, Yahoo! is set to have a major payday with Alibaba likely to be a publicly listed firm in 2014 or 2015. Depending on the pricing of Alibaba, Yahoo! could receive more than $10 billion after taxes, as Alibaba is reportedly worth more than $175 billion.
And Yahoo! will almost certainly return a sizable portion of the proceeds from its partial sale of Alibaba, and in the process grow its share repurchase program after the fulfillment of the current authorization. In other words, Yahoo! will buy back well over 13% of itself, assuming the company doesn't make sizable acquisitions in the near-term.
Sirius XM is a cash-generating machine
Satellite radio company Sirius XM has been growing its cash flow rapidly thanks to its stable subscriber growth. Sirius XM has more than 25.8 million subscribers, which include 21.2 million self-pay subs, and offers more than 140 radio channels, which include a number of exclusive channels.
The operating cash flow of Sirius increased 49% in the last quarter to $251 million, and its free cash flow increased 56% to $223 million. Sirius' satellite radios are being installed in 70% of all new cars, and with auto sales back to pre-recession levels of 16.1 million annually the company should have steady increases in its subscriber base. Sirius XM's management estimated that 2014 year-end subscribers would be roughly 26.8 million.
The company is utilizing its robust cash flow to make sizable repurchases. At the end of 2012, Sirius XM had 6.8 billion shares outstanding and this trickled down to 6.17 billion at the end of the last quarter. Sirius XM has a market cap of roughly $20.2 billion, and it has $1.7 billion remaining in its share repurchase authorization. Since Sirius XM is buying back a significant portion of its outstanding market cap, the company should see robust EPS growth in the future.
Viacom is shrinking share count promptly
Media heavyweight Viacom has a gigantic share repurchase program of $20 billion approved by its board. At the end of the last quarter, $8 billion had yet to be used, which represents more than 21% of the company's current market cap. Driven by a blended combination of net income growth and share repurchases, Viacom saw its diluted EPS grow 18% year-over-year to $1.13 in the last quarter.
Viacom's media networks segment is the key driver of the company's revenues and earnings. This segment made up 75% of the company's total revenue and all of its operating income in the last earnings report, as Viacom's film entertainment segment suffered a loss because of fewer theatrical releases.
Viacom's popular media networks, which include the likes of MTV, VH1, Nickelodeon, Comedy Central, BET, etc., are resonating with fans worldwide -- they have a combined reach of more than 700 million households in more than 160 countries. And the company recently acquired Channel 5 in the U.K. which reaches 42 million households, and thus ensured that its content distribution platform is on the rise. Viacom has a solid moat around its business due to the global reach of its high-quality content. The out-sized share buyback program of the company will boost EPS substantially in the years ahead, and more than likely drive the stock higher.
The bottom line
Firms that have strong moats around their businesses and ample cash flows can create value for longer-term shareholders by repurchasing their own stock at cheap prices. However, some companies repurchase stock at the same pace every quarter without considering valuation, oftentimes destroying shareholder value. When management is opportunistic about the size of a share repurchase when the company's valuation is low, then long-term believers in the company tend to do very well with their investments.
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