The more things change, the more they remain the same. Last year was a big one for Sirius XM Holdings (SIRI). It closed on its $3.5 billion purchase of Pandora Media, a move that popped annual revenue growth back into the double-digits -- not organically, of course -- for the first time since 2014. Sirius XM also lapped an important milestone: the 10-year anniversary of when the stock bottomed out at $0.05 a share and the company was bracing for bankruptcy reorganization.
The one thing that hasn't changed is that once again, the satellite-radio provider came through with positive returns in 2019, something it has now done for 11 years in a row. What will it take to stretch that winning streak to a cool dozen years? I've been over some of the things that can go wrong for Sirius XM in 2020, so now let's talk about the things that can go right.
Image source: Sirius XM Holdings.
1. Post-Pandora synergies can pick up the pace
Sirius XM and Pandora getting together was inevitable; they're the perfect match. Sirius XM is a slow-yet-steady grower in premium radio, but it hasn't been much of a factor in streaming despite dabbling in the niche for the past decade. Pandora commands a large-yet-shrinking audience of ad-supported freeloaders, but its much smaller paying audience is actually growing.
In an ideal world, Sirius XM subscribers become premium Pandora accounts, and Pandora users warm up to satellite radio. However, since cross-selling is easier said than done, the easier lift can be to just integrate each platform into the other to make the overall product more valuable to listeners. A Pandora-branded channel launched on Sirius XM in the springtime of last year. The priciest of Sirius XM's plans that includes satellite and online access now includes Pandora-powered personalized stations. Combining products with a best-of-breed approach should improve Sirius XM's pricing elasticity as well as subscriber retention. We'll see if average revenue per user keeps climbing with churn staying low in 2020.
2. A better-than-10% dividend hike would turn heads
Sirius XM isn't exactly on the radar of dividend income investing given its pedestrian 0.7% yield. It's fair to overlook Sirius XM as a payout play. It didn't initiate a quarterly distribution policy until late 2016. However, it has gone on to increase its dividend by exactly 10% in each of the three subsequent years, lifting that rate from $0.01 to $0.01331 per share along the way.
With Sirius XM's stock climbing 25% last year, this means the yield is actually lower now than it was a year earlier, despite the hike. Obviously, investors are pumped about the capital appreciation, but Sirius XM could get more play with income investors if it were to pick up the pace on the annual hikes.
Sirius XM is good for the money, having generated roughly $1.6 billion in free cash flow last year. There's no longer a need to aggressively pay down its debt, eat into its share count through buybacks, or pack the vault for another big-ticket acquisition. Its payout ratio is now a little more than 20% based on the $0.26 a share that analysts see it earning in the year ahead, so it can turn heads by doubling its dividend rate without having to sacrifice much in return. Reported growth will slow next month after we lap the Pandora acquisition, so there's no harm in trying to more aggressively court income investors as top-line growth resumes its historical single-digit growth pace.
3. The cord-cutting revolution can help
A decade ago, it was satellite television -- not satellite radio -- that was the market darling. Things are different now, with cord-cutters replacing cable and satellite television bills with lower tabs for streaming services. At first glance, this could be scary for SiriusXM. Isn't it a matter of time before the same cord-cutting mindset finds Sirius XM subscribers turning to cheaper streaming alternatives in their connected cars? Take a closer look, though, and the outlook is brighter.
Folks nixing their pay-TV platforms still crave the creature comforts of news and sports, things they can now get through Sirius XM. Folks embracing streaming video also now have easier access to the Sirius XM and Pandora streaming apps through their devices, helping take some of the sting out of the diminishing auto ownership trends that would otherwise threaten satellite radio.
Streaming isn't the enemy. Streaming is the opportunity.
