Time Warner Cable (NYSE: TWC) has spent $1.4 billion on share repurchases over the past 12 months. This is a lot of money to spend on share repurchases, considering the company already spends a lot of money on other initiatives. The company spent $3.6 billion on capital expenditures over the same period to expand its network reach and subscriber base. In addition, the company pays a $3-per-share annual dividend, which costs another $847 million per year.
While all of this is going on, the company's core business initiative, the pending merger with Comcast (CMCSA -5.20%), is the focal point for investors. With that in mind, it might seem like a waste to spend so much money on share repurchases when the company is trying to be acquired. However, Time Warner Cable's buybacks serve a real purpose, and they might lend a helping hand in creating maximum value for shareholders when the merger goes through.
Top priority: Merger with Comcast
Over the past year, the biggest priority for Time Warner Cable has been its pending merger with Comcast. Earlier this year, Time Warner Cable agreed to be acquired by Comcast and become a wholly owned subsidiary of Comcast. This makes a lot of sense for Comcast, because Time Warner Cable's subscriber growth and revenue metrics are improving. For example, last quarter, Time Warner Cable posted 42,000 residential triple play additions, representing the best second-quarter performance in two years. It also added 67,000 high-speed residential data connections and 79,000 residential voice additions, the best performance on these metrics in several years.
One potential red flag for Time Warner Cable is that it continues to suffer from the "cord-cutting" trend currently sweeping across America. Last quarter, the company lost 34,000 residential customers. Comcast likely isn't deterred by this number because the total still represents Time Warner Cable's best second-quarter performance in the past five years. Comcast itself lost 25,000 customers last quarter.
Cable providers aren't as concerned about subscriber losses as they are about average revenue per customer. And, on that metric, Time Warner Cable is doing very well, and that's what Comcast is really after. Most customer losses come from those purchasing single products. The gold mine for cable providers is bundling multiple products at a time into one high-margin package. That's why Comcast and Time Warner Cable are reporting higher revenue even in light of significant customer losses. Time Warner Cable grew average monthly revenue per residential customer by 1.7% last quarter, to a total of $106.98.
Share buybacks serve a purpose
While all this is happening, it might seem like a distraction for Time Warner Cable to buy back so much of its stock. However, the buybacks have served a real purpose, which is to get the highest takeover price possible. Time Warner Cable's buybacks over the past year reduced its diluted share count by 3.7%, to 282.4 million at the end of the most recent quarter. This helped generate the company's 16% earnings growth over the first half of the year, since retiring shares causes a company's remaining shares to capture a higher portion of profits, thus creating value.
The more valuable Time Warner Cable's shares become, the higher earnings multiple the stock achieves, and this helps get the highest stock price for a takeover. Time Warner Cable shareholders recently voted on the merger, and the proposal was met with more than 99% approval. The terms of the proposed agreement call for each Time Warner Cable share to receive 2.875 shares of Comcast.
In short, increasing profits as high as possible was crucial for Time Warner Cable getting the maximum price possible in order to be acquired. The share buybacks helped accomplish this, since revenue growth only clocked in at 2% through the first of the year. As a result, it's clear that Time Warner Cable's share buybacks did what they were supposed to do.
