If it's mid-July, it's apparently a good time to eat your own cooking if you're Sirius XM Holdings (SIRI). The satellite radio giant's board authorized an additional $2 billion in stock buybacks, along with its regular quarterly dividend.
If Sirius XM earmarking $2 billion in share repurchases sounds like a familiar summertime story, it's only because the media giant did the same thing on July 14 of last year. The board has authorized $18 billion in share buybacks since 2013, using its bountiful free cash flow to eat away at its equally substantial share count.
Dolly Parton during an interview on Sirius XM. Image source: Sirius XM Holdings.
Looking a gift horse in the mouth
Returning money to its shareholders through 10-figure buybacks seems like a good idea in theory, but it's not always a winner. Last year was generally a good one for entertainment stocks, but Sirius XM didn't go along for the ride. The shares declined in 2020, ending an impressive streak of 11 consecutive years of delivering positive stock returns.
You can't fault Sirius XM's approach. It's a cash machine. The sat-rad monopoly expects to generate $2.575 billion in adjusted EBITDA or $1.6 billion in free cash flow this year. In short, it's good for the money.
The $2 billion will go a long way. Sirius XM's stock has been trading exclusively in the single digits since early 2002. The buyback would be good to repurchase more than 300 million shares at current prices. The rub here is that Sirius XM has a lot of shares outstanding even after the massive buybacks over the past eight years. We've seen the fully diluted share count contract from a peak of 6.9 billion at the end of 2012 to 4.2 billion today.
There aren't too many companies with as many shares as Sirius XM has, but it has lowered its share count by nearly 40% over the past eight years. Nibbling away at its substantial share count matters, especially now that its top-line growth has decelerated sharply. Revenue rose just 3% last year, but on a per-share basis it's closer to 7% growth.
Some investors don't put a lot of weight on share buybacks. They would rather see companies investing back in a business or rewarding shareholders directly through cash distributions. However, eating its own cooking is a move that has paid off for Sirius XM. Despite last year's 9% split-adjusted slide, the stock has still moved higher in 11 of the past 12 years. Most of its buybacks since 2013 have come at much lower price points than where the stock finds itself now. Investors may not be getting cash rewards with a buyback, but they are owning a larger piece of the company in the process.
Sirius XM is an interesting media stock. It fell out of favor last year as the pandemic weighed on subscriber counts early in 2020, but it's well positioned for the rebound in the car market that we're seeing coming out of the COVID-19 crisis. Betting on itself has paid off in the past, and it should continue to be a smart call in the future.
