Does CBS's $6 Billion Stock Buyback Make Sense?

Courtesy: CBS Corp.

CBS Corp. (PARA -0.47%) stock has had an interesting year, rising in the first part of 2014, but then falling since March to now trade near 52-week lows. Even though the company reported year-over-year growth in the most recent quarter, and has great growth opportunities for the future, the stock looks undervalued now compared to industry competitors Disney (DIS 0.18%) and Time Warner (TWX). One buyer who is getting in on the stock at these low prices is CBS itself.

CBS has bought back a significant number of shares in the last three years, and that buyback spree is accelerating now. The company doubled its buyback authorization to $6 billion in August. But does this plan make sense for CBS? Here are three things to consider.  

1. Buying back at a discount
CBS has been committed to this share buyback program for some time, but has started to increase buybacks aggressively this year. The company first stated its current buyback program would go into effect back in January 2011. However, while the initial outlay was $3 billion in buybacks, the company announced in the most recent earnings call that the program would be increased to a total $6 billion.

It makes sense for the company to do that sooner rather than later. Following the company's recent share price declines, the stock is selling at a discount right now. CBS is already one of the cheapest stocks in this industry with a P/E of around 15.8. Compare this to Time Warner with a P/E of 16, Disney at 20, and the industry average P/E of 25. With shares of CBS near their 52-week lows, the coming Q3 earnings release would be a great time to hear that the company took advantage of buying back many of its shares during the last few months -- which will likely be the case.

2. Are there better uses for the company's limited cash?
The company doesn't have an extremely large cash reserve to pull from for these stock repurchases. Its operating cash flow of $1.45 billion is relatively low, about a third of Time Warner's. Yet, the company does not have much of a debt burden.

The company could work to pay off its long-term debt further, but at a debt-to-equity ratio of just 67, the company does not need to prioritize paying down debt at the expense of other uses of its money.

As for returning value to shareholders in the form of dividends, the stock already has a dividend yield of 1.2%.  While this is not a massive dividend yield, it's enough. Plus, the growth in share price that could come as the company expands on its new operating priorities would add more to shareholders' portfolios than a small bump in dividend would. 

3. The new CBS strategy: Less advertising and more content
CBS is a conglomeration of many TV networks, which means that, historically, advertising was its main source of revenue as it aired other companies' content, and then sold advertising time during those programs. However, the advertising segment of the company has been diminished recently due to increased low-cost advertising competition.

But that's fine for CBS as it transforms itself into more of a content-creation company, with less focus on advertising during the airing of other companies' content, and more focus on creating its own content to air and license out. The strategy is already working and, during the most recent earnings call, CBS CEO Leslie Moonves reported that CBS has ownership in more than 70% of the total lineup this fall, including top-rated TV series like NCIS and The Big Bang Theory. Moonves also noted that the company leads the industry of all broadcast networks with 47 Emmy nominations this year already.

Courtesy: CBS Corp.

Financially, this move to content creation could mean big increases in the company's bottom line as CBS signs major deals with international networks to carry its shows. According to management, CBS can expect $2 million per episode for a brand-new drama, and $3 million or more for more established shows, such as NCIS. The newest show in this series, NCIS: New Orleans, already has a large international deal in place and more domestic deals are likely to come. The company expects as much as $5 million in revenue per episode.

Should the company be using more money to reinvest in its business and help to spur on this transformation instead of buying back shares? According to the company's success this year, it seems the company has it's new strategy under control already. Therefore, the company  doesn't need to keep throwing more money at this transformation, and that money could be spent buying back cheap CBS shares instead, for even more future value.

CBS's buybacks are one more case for a strong company to watch now
CBS's stock is down during the last eight months, even though the company reported an acceptable Q2 performance. Because the earnings were below major competitors', though up year over year, CBS shares have been oversold. However, with growth in content and less reliance on advertising, and the potential for major revenue-producing international deals, the company looks like it's making the right moves to keep increasing earnings further going forward. With the stock near its 52-week low, it makes sense for CBS to make this major investment in itself now.