There are a lot of companies that are issuing Special Dividends in an effort to help their shareholders avoid the probable increase in taxes next year due to the looming fiscal cliff. Many have wondered if Sirius XM (SIRI) would do the same for its investors. The company is stocked with lots of cash right now, so what better time to reward loyal shareholders. And now today:
Sirius XM Radio Inc. today announced that it has entered into a new $1.25 billion five-year senior secured revolving credit facility with a syndicate of banks and other financial institutions. The new facility is secured by substantially all the assets of the company and its subsidiaries and was not drawn upon at closing. The company will use borrowings under its facility for working capital and other general corporate purposes, including without limitation, share repurchases, dividends and the financing of acquisitions.
On Monday, Sirius CFO David Frear spoke at the "40th Annual UBS Global Media and Communications Conference". When he was asked about share buybacks he responded that "Liberty would have to approve it". Most analysts have assumed that any share buybacks would occur after Liberty Media (LMCA) took control of the company in early 2013, with FCC approval. However, there is nothing stopping Sirius from doing a buyback, or special dividend right now, before the end of the year. And, I could be wrong, but I think this press release which says the company "will use borrowings" for share repurchases and dividends, could constitute the notification to the public that buybacks might occur at anytime without further announcement. That may not be the intent of the statement, but it is implied.
Even though corporate taxes are not part of the fiscal cliff, that does not mean that they are immune from the negotiations going on in Washington. Both sides seem to agree that to raise revenue through businesses would cause more and more companies to operate in other countries where those taxes are smaller. According to one study, most of the top US companies do not even pay the current 35% tax rate. This is because the United States has the highest corporate taxes in the world right now. So any company doing business in a foreign country will shift income into that country in order to pay their lower tax rate, thus avoiding higher U.S. taxes. A lot of analysts think that by lowering the corporate tax rate in this country, it would actually increase revenue to the IRS.
However, loopholes such as a Reverse Morris Trust (RMT) could definitely be on the chopping block. Earlier this year, congress came very close to eliminating them. But now the mood in Washington has changed, as they look for every possible source of revenue. With that option gone, Liberty could face taxes when (and if) it liquidated any of the Sirius stock it holds. So to sell into a Sirius buyback right now would at least remove the uncertainty of what will happen next year.
Both companies have had a great year, as they continue to beat the NASDAQ. But yesterday Sirius and Liberty shares dropped due to a Starz agreement with Disney (DIS) that was lost to Netflix (NFLX), according to Stephen Faulkner. He thinks that this should not affect Sirius. However, I do see a reason for caution. Sirius is in negotiations all of the time with the automakers, entertainers, etc. With the loss of Sirius CEO Mel Karmazin, who is leaving in February, many investors are concerned that the company will be hard pressed to replace such an expert negotiator. So I understand some shareholder's concerns.
A Special Dividend, or share buyback right now could definitely erase any negative thoughts that people have. And Faulkner is right, this Starz issue is not directly tied to Sirius. Until Karmazin is gone, there is no real reason for concern. At the current share price of $2.77, I think the stock is a great buy. And now that we can see some sort of return of capital on the horizon, the shares should get out of this stall that they have been in.
Disclosure: I am long SIRI.