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Sirius XM Is Insatiably Cannibalistic

By Rick Munarriz - Jul 16, 2014 at 11:41AM

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Sirius XM Holdings Inc. adds another $2 billion to its buyback efforts.

Mom, Sirius XM Holdings (SIRI -2.51%) is gnawing on itself again! 

The satellite radio giant announced Tuesday afternoon that its board is approving the purchase of $2 billion worth of stock. If the authorization sounds familiar, it's because this is the third time that Sirius XM has gone this route. 

It's been 19 months since Sirius XM turned heads by announcing that it would be buying back $2 billion worth of its stock over time. Just 10 months later, its board gave the green light to snap up another $2 billion. The new announcement, made shortly after the market closed Tuesday, brings us up to a whopping $6 billion in planned buybacks. 

Now this doesn't mean that Sirius XM has to buy all of the stock. It's merely an authorization. However, history shows us that it's not just lip service when it comes to Sirius XM. By the time it announced its second buyback in October 2013 it had already eaten its way through $1.6 billion of the original repurchase. This time around, Sirius XM isn't telling us how deep it has gotten into its efforts, but back in late April it did reveal that it had purchased a cumulative tally of $2.3 billion -- out of what was then $4 billion in authorizations -- after taking a $340 million chunk of shares off Liberty Media's hands. 

Liberty Media continues to hold a controlling stake in the satellite radio darling, but as Sirius XM buys back its stock, it has the flexibility to also whittle down Liberty Media's total share count. 

Sirius XM is good for the money. It's making a ton of dough these days. It expects to approach $1.1 billion in free cash flow. It has also borrowed money to assist in its buyout efforts, but everything appears to be under control. Sirius XM's target is to keep total debt at less than four times annual adjusted EBITDA, and as of the end of the first quarter that leverage ratio was clocking in at a modest 2.8. 

The market hasn't necessarily rewarded Sirius XM for eating its own cooking. The stock has risen just 22% in the 19 months since the day before it announced its initial buyback through Tuesday's close. That's not bad, but it's a little more than half of the S&P 500's 40% return in that time. 

This is still something that's important to Sirius XM's ability to move its stock higher in the long run. Sirius XM has printed a lot of shares over the years. Doubling its share count to bring on XM Satellite Radio makes sense, but the 40% preferred share stake it handed to Liberty Media when it was on the brink of bankruptcy was more predatory than payday loans at check-cashing outfits. It was also liberal with stock and option grants to attract and retain talent when its stock price was trading a lot lower than it is today. 

In the end, Sirius XM is doing the right thing. Its fully diluted share count was down to 6.1 billion as of the end of March, and the lower that figure gets, the better its chances of appreciation will be as its growing revenue and profitability gets divided into fewer shares. 

Keep gnawing away at yourself, Sirius XM. Enjoy the buffet, and don't worry about what the market thinks about your table manners.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of Liberty Media and Sirius XM Radio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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