Sirius XM Holdings (NASDAQ:SIRI) has had one of the more voracious appetites on Wall Street. The satellite radio provider has bought back nearly $2.2 billion worth of its stock over the past 12 months.
It's easy to justify Sirius XM's aggressive purchases. The one thing that has always kept Sirius XM back is that it has just too many shares outstanding.
First there was the 2003 recapitalization that spiked its share count as debt and preferred shares were exchanged for more than 622 million freshly minted shares of common stock. That was followed by the 2008 merger between Sirius Satellite Radio and XM Satellite Radio, which doubled the shares outstanding. A year later it handed Liberty Media (NASDAQ:FWONA) a 40% preferred share stake in the company for providing bankruptcy-averting financing. There have also been smaller debt-to-equity exchanges and the liberal use of stock options grants, particularly when the stock was trading substantially lower than it is today.
The end result is that Sirius XM has a lot of shares outstanding. There were more than 6.2 billion fully diluted shares outstanding by the end of its latest quarter, and that's with the media giant hitting the gas when it comes to repurchases.
There are only a handful of companies with more shares outstanding, and they are much larger than Sirius XM with the $4.1 billion that it's targeting for revenue this year. It's hard to move the needle when every dollar in profit has to be divided by more than 6 billion shares. As great as Sirius XM's stock has been since bottoming out at $0.05 -- yes, a nickel -- five years ago, just imagine how high the stock would be today if it had been more careful with its stock certificates on the way up.
Making it happen
Does Sirius XM repurchasing $2.2 billion of its stock make sense? You bet it does. The only shame is that it didn't have the ability to start reducing its outstanding stock load a few years ago when the stock price was a lot lower. Then again, that simply wasn't an option when it was on the ropes after regulators held up the merger of the country's only two satellite radio providers. Sirius and XM had to wait more than 17 months after announcing their union in early 2007 to officially tie the knot in the summer of 2008. That cloud of uncertainty took its toll, and it's why by early 2009 Sirius XM didn't have much of a choice but to give up a 40% chunk of the company to Liberty Media and pay 15% interest on the financing that Liberty Media was able to provide.
Thankfully, a lot has changed since the days when Sirius XM and its stock hit rock bottom five years ago. Sirius XM wouldn't be able to take on a 10-figure buyback now if its free cash flow and credit rating hadn't improved dramatically over the years.
Sirius XM's free cash flow -- it's eyeing $1.1 billion in free cash flow for all of 2014 after bringing in $927 million last year -- is affording it the flexibility to return money to its shareholders through buybacks. Sirius XM's scalable model, with high fixed costs but relatively low variable expenses, leaves us with a dynamic broadcaster where subscriber growth leads to exponential growth elsewhere. Self-pay subscribers grew by a modest 8% last year, but revenue and free cash flow climbed 12% and 31%, respectively.
Sirius XM's improving fundamentals have led to credit rating agencies boosting their perspectives, and this isn't just validation in the form of a pat on the back. Sirius XM has been able to take advantage of being declared less risky to creditors in this low interest rate climate to extend the maturity of older debt by raising money at lower rates. It raised $1.5 billion in May, with a good chunk of that earmarked for buybacks.
In the end, Sirius XM's improving state is making it easier to do what it should have been doing years ago to reverse its gargantuan share count. It's going to be a long process, but putting more of its money where its mouth is -- $2.2 billion over the trailing 12 months -- is the smart thing to do.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of 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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