Tuesday, I wrote an article speculating that Sirius XM (SIRI) might pay a special dividend, and buy back its own shares in December, due to a revolving credit agreement the company made with a series of banks for $1.25 billion. Many Sirius bears did not think that the company would (1) buy back shares before FCC approval of the Liberty Media (LMCA) takeover, and (2) be able to put together a special dividend before the end of the month. But Wednesday the Sirius Bulls were rejoicing. The company, against all odds, announced that it will indeed pay a special dividend, and begin the long awaited share buybacks:
NEW YORK, Dec. 6, 2012 /PRNewswire/ -- Sirius XM Radio Inc. today announced that its Board of Directors has approved a $2 billion common stock repurchase program. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions. Liberty Media Corporation, the beneficial owner of approximately 49.8% of the Company's stock, has indicated that it will participate in the Company's share repurchases on a pro rata basis so that its relative ownership interest will not be affected by the program. The Company will fund the repurchases through cash on hand, future cash flow from operations and borrowings under its revolving credit facility.
The Board of Directors also declared a special cash dividend in the amount of $0.05 per share of common stock, payable on December 28, 2012 to stockholders of record as of the close of business on December 18, 2012. The Company's preferred stock will participate in the dividend on an as-converted basis in accordance with its terms. The total amount of the cash dividend is expected to be approximately $325 million.
Paul R. La Monica of CNN Money is reporting that Howard Stern will now be a happy camper, considering the fact that he is a big shareholder and works for the company. La Monica said that he has been saying all along that Sirius would beat Pandora (P). Sirius rose from the "near dead" in 2009, and since then it is has had a "huge run", and is up 2266%.
This news sent the shares back up to $2.86 in pre-market trading. And the volume pre-market was a staggering 30 million shares before the market opened. There are some analysts that think the share buybacks have been baked into the price of the shares due to all the news on speculation that buybacks would eventually occur. However that high price was almost $3 a share in October, and did not include the five cent special dividend that has just been announced today:
So this should finally take the shares over $3.00. Then as the shares are retired in the buybacks, I think the stock will be back on track to hit $3.65 based on fewer shares, and the expected record breaking fourth quarter. Earnings should triple this quarter in an income tax free environment due to the billions of dollars in NOLS the company has. And to add icing on this cake, the November new car sales are up, which means the subscriptions will be even higher than projected. The company has current subscription guidance of 1.8 million net additions. However, considering that the total for the first three quarters of 2012 was 1.5 million net adds, it is pretty conservative to expect two million total net additions for 2012. Even in a bad market the stock continues to soar. Before this announcement, it was up almost 60% compared to the major market indices for the year:
Another catalyst that can make the shares pop is the current short interest in Sirius. And the timing of this announcement will force a lot of shorts to cover right when the shares will be bought to be "on record" for the special dividend. There are some that will argue that this is not significant, however I strongly disagree. Last January 4, when Sirius announced record high subs for 2011, the shares soared on the news, creating a huge short squeeze. The shares went from $1.83 to $2.19 in 9 trading days:
This activity was caused by historically high net sub additions of 1.7 million for 2011. I expect the announcement of 2 million net additions for 2012 to be equally dramatic. So not only do shorts have to worry about what will happen to the price this month as the buybacks begin, and traders pile in for the special dividend, they can look forward to a sub announcement in just over three weeks. The latest short interest according to NASDAQ is at a three month high:
Piper Jaffray has just announced a $3.20 price target due to this news, and added that it should not cause any complications in the impending takeover of Sirius by Liberty Media. Because Liberty will sell shares on a pro rata basis. This means that if the stock drops Sirius can take advantage of it and buy shares on the open market, which will effectively offer a safety net for investors. And when the shares go up, Liberty can sell shares to Sirius at a higher price. Because this would be a 1:1 ratio, Liberty can maintain its current ownership of Sirius without going over 50% until it gets FCC approval. All of those shares will then be retired, which means that every shareholder will own a larger chunk of the company.
For instance (all of these numbers are simple estimates) if we consider that there are the equivalent of around 6.5 billion shares, worth around $3.00 a share, the market cap would be $19.5 billion. With a $2 billion share buyback at $3 a share, around 10% of the company shares could be retired, leaving 5.84 billion shares. Since the value of the company theoretically remains the same at $19.5 billion, the new share value automatically jumps to $3.34 (19.5/5.84) just because of the buyback which made the share count lower. It's like a pizza with 6 pieces has bigger pieces than one with 8.
Then add in historically high quarterly results, more buybacks in the future, and the sky is the limit. Of course these are just estimates, and the real results could be different based on what the price of the shares are during the buybacks. For instance the company could be buying shares today at a low price of $2.79.
However, it is a win-win situation. If the price drops, the company can buy more shares. And if it goes up, that was the main objective to begin with. Some investors are very leery of buybacks, because they believe that traders know that the company is buying, and try to trade around it on the open market, which is the most popular type of buyback. But, as I discussed in an article earlier this year which compares buybacks to dividends: with this type of purchase Sirius can take advantage of buying its stock while having "insider information":
It is relatively easy for insiders to capture insider-trading like gains through the use of "open market repurchases." Such transactions are legal and generally encouraged by regulators through safe harbors against insider trading liability.
And this information does not have to be shared with the public. As long as the trades do not exceed a certain number of shares per day, Sirius XM can keep the timing of buybacks a secret. And they do not have to repurchase the entire amount of the buyback at once. It can be daily, monthly, yearly or any combination of these. There are many SEC guidelines and rules which include the stipulation that the company must use one broker so there is not the appearance of many different investors trying to purchase large amounts of the stock:
The section of the law concerning trading volume, which limits the amount of shares an issuer can purchase on a single trading day, has been streamlined after the same SEC amendments. It now requires that an issuer may simply not purchase shares exceeding 25 percent of the stock's four-week ADTV.
So, a carefully designed and executed buyback, can indeed add capital to each share. How high will the shares go? Here is what 15 brokers reporting to Yahoo Finance think. They have targets all the way up to $4 a share:
Price Target Summary
|No. of Brokers:||15|
In my opinion that low estimate of $2.25 isn't even in the ballpark, and it is skewing the averages lower. That estimate is from one analyst that some people believe "got it wrong". So, a target of $3.65 is definitely in the ballpark.
Still many investors are scared to buy right now due to the fiscal cliff, and the possibility of a recession. And there is a legitimate reason for fear. However, I maintain that Sirius has proven its tenacity, and had a terrific run during some very trying economic times. Also, according to TrueCar.com, the fiscal cliff will not have a major impact on auto sales which drive the company's revenue:
"November was a strong month for new car sales and the impact from hurricane Sandy helped to boost auto sales to its highest since February 2008," said Jesse Toprak, senior analyst at TrueCar.com. "Import automakers got the biggest lift due to some increased incentive spending building momentum heading into next year. We don't expect any major impact on auto sales from the ongoing fiscal cliff discussions."
There are probably a lot of investors that are afraid that the shares are too high right now due to all of the gains over the last several years. But if you look at the chart below, you will see that the shares have been trading above the 50-day moving average for the last year. The only dip below the line was from mid-May to mid-July when it became apparent that the Liberty takeover was going to be hostile. So I do not see the price dipping below what it is now.
But, do your homework on buybacks, and if you want to get in on this money maker, I suggest you do it quickly. There may be dips in the future, but the company will be competing with you, as it is also buying during those same dips. For all of you Sirius bulls that have held your shares through thick and thin: Let the buybacks begin.
Disclosure: I am long SIRI.