Another year, another $2 billion buyback. For the fourth year in a row, the board at Sirius XM Radio (SIRI -2.24%)has authorized $2 billion in stock repurchases.
Since the initial buyback in late 2012, Sirius XM has put its growing ability to generate free cash flow, and its improving fundamentals, to good use in tackling its gargantuan share count. We've seen Sirius XM's average weighted shares outstanding go from 6.635 billion during the fourth quarter of 2012 to just less than 5.508 billion in its latest report.
Buyback authorizations aren't just talk at Sirius XM. It's a voracious eater of its own cooking. The share count has dipped sequentially in nine of the past 10 quarters according to data from S&P Capital IQ. It announced during last month's earnings call that it had already spent $1.3 billion to snap up 388 million shares so far in 2015. This follows the satellite radio provider repurchasing 739 million shares for $2.5 billion through 2014.
This doesn't mean that the share count is dropping by that amount. The weighted average of the basic shares outstanding declined by just 536.6 million between the fourth quarter of 2013 and the fourth quarter of 2014. New shares get issues to cover executive and employee compensation.
There's also nothing stopping Sirius XM from using stock as legal tender in future acquisitions. As one of the market's best performers since bottoming out six years ago, sealing a buyout with stock instead of cash is a more compelling bargaining chip than you probably think.
In the end, this is all about taking a lumberjack ax to the redwood tree of shares outstanding that escalated during desperate times of recapitalization and self-preservation. Sirius XM's a survivor now, and with guidance calling for $1.62 billion in adjusted EBITDA, or roughly $1.3 billion in free cash flow through 2015, it's the right thing to do.
Return to sender
Many investors view dividends as the primary way for a company to return money to its shareholders, but buybacks are potentially better.
- Lowering a company's share count increases profitability on a per-share basis.
- Purchases in the open market help support a stock, especially if they're executed in times of market volatility.
- Unlike dividends, buybacks don't have tax implications for shareholders.
- Market cap is the product of a stock price and its outstanding shares, so in theory, buybacks should translate into higher share prices given the same valuation.
Sirius XM refused to go with a reverse stock split when things seemed bleak. While the stock price remains below $4, no one is arguing that a split is necessary, as long as it continues to grow its business as it shrinks its share count.
The business is certainly holding up its end of the bargain. Sirius XM wrapped up its latest quarter with a record 28.4 million subscribers, and monthly churn is at an historic low. Wednesday's expanded buyback authorization will make sure that the share count plays along, too.