AOL May Regret Distributing $1.1 Billion To Shareholders

| About: AOL Inc. (AOL)

Calls for the death of AOL (NYSE: AOL) have been premature and CEO Tim Armstrong deserves a lot of credit for not only getting the stock up to a new post-AOL Time Warner high at $34 per share, but also for the recent $1 billion patent sale to Microsoft (NASDAQ: MSFT). With a strong balance sheet, AOL has announced that it will go ahead with its plan to distribute 100% of the sale proceeds to shareholders by way of a $500 million special dividend and $600 million share buyback program.

Now don't get me wrong, I am all for dividends and buybacks as a way to create shareholder value, but in the case of AOL specifically, I find this strategy a bit odd. Is AOL really in such a strong competitive position that it can afford to forgo reinvesting in and expanding its existing business and instead just give cash back to investors?

After all, this is the same AOL that last quarter got 33% of its revenue from legacy dial-up Internet subscribers. That business declines about 10% every quarter and the company's efforts to diversify recently have been mixed; buying The Huffington Post for $300 million might well pay off, but the local blog Patch initiative has yet to bear fruit.

It simply strikes me as very risky, given AOL's current position in the markets in which it operates (after dial-up, banner advertising is their next largest business at 26% of sales), to distribute all that money. Investing in new products, making further acquisitions, or a combination of both, would seem to be a much better way to restart growth at AOL and try and become relevant on the Internet again.

With the stock hitting new highs, I can't help but take a negative view going forward. Once the patent money is gone and investors once again focus on AOL's core operations, they might not like what they see. A few years from now I would not be surprised if they regret not using this $1.1 billion in a much different way. It might be time to take profits if you have been fortunate enough to ride the AOL share price up 200% (from $11 to $34) over the last 12 months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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