DirecTV (DTV) is about to wrap-up an incredibly aggressive share buyback program where the company has repurchased roughly 65% of outstanding shares since 2006. At the start of 2014, the company had $1.6 billion left under authorization for repurchases and expects to wrap up the program in early 2014. This will conclude a $30 billion repurchase program that when all said and done will have removed almost 70% of outstanding shares. The question then becomes, how will the company return value to shareholders going forward and can they sustain another aggressive program to return value to shareholders?
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9 months ended
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The company continues to see revenue and EPS growth from solid subscriber growth in the US and Latin America. DirecTV US added 139,000 subscribers in 3Q2013 to surpass 20 million total subscribers. DirecTV Latin America owns 93% of Sky Brasil, 41% of Sky Mexico and 100% of PanAmericana. Sky Basil and PanAmericana added 260,000 net customers in the quarter to total 5.3 million and 6.1 million customers, respectively. Sky Mexico had approximately 5.88 million customers at the end of the quarter, bringing total DirecTV Latin America customers to 17.22 million. The company sees Latin America as one of the main revenue drivers going forward as there is still plenty of room for the company to expand.
At the end of 3Q2013, DirecTV had $1.62 billion in cash and cash equivalents. To enable the company's massive share buyback program, the company had to borrow to finance much of the program. This has left the company with $18.6 billion in long-term debt. While most of this debt has limited near term maturities, it is a significant issue. DirecTV has roughly $2 billion in annual free cash flow, which makes short-term debt manageable. Comparing DirecTV's debt ratios to its peers, DirecTV has the highest total debt to capital ratio. With all the long-term debt accrued since 2006 for the $30 billion share buyback program, it is unlikely such an aggressive program will continue once the current share buyback authorization is concluded.
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On DirecTV's investor day on December 12, 2013, management stated they expect to return $3.5-$4 billion to shareholders in 2014. This will either be done through continued share buybacks or dividends. Due to a rising share price and the end of a 9-year share buyback program, a portion of this money will likely come back to shareholders through dividends. DirecTV's biggest competitors, Comcast and Time Warner, both offer moderate dividends.
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With outstanding shares of 525.4 million (as of 1/17/14), the company has the ability to offer an attractive yield by using free cash flow. If the company used half of their free cash flow of approximately $2 billion, they could issue a dividend of $1.90/share.
This would lead to a dividend yield of 2.6%. ($1.9/$72 share price=2.6%). This would be an impressive start to a dividend payout. Most likely, the company would offer a dividend yield closer to its competitors of 1.5%-2%.
DirecTV has done an amazing job of repurchasing approximately 65% of total outstanding shares. While this program will come to an end in early 2014, management is committed to returning excess capital to shareholders. Of the $3.5-$4 billion that the company has stated they plan to return to shareholders in 2014, I believe a good portion of this will come back in the form of newly issued dividends. The company has strong revenue and EPS growth to easily sustain a moderately sized dividend going forward.