In late 2012, Sirius XM Radio (NASDAQ:SIRI) announced a special, one time dividend payment of 5 cents per share along with a $2 billion share buyback. The news was cheered by investors. If you recall, as recently as 2009, Sirius XM was on the verge of bankruptcy, with it's shares trading at under 15 cents. Oh, how the times have changed. Sirius XM has accomplished an incredible comeback and is now a rapidly growing company with gobs of free cash flow. Savvy investors will likely be rewarded again as Sirius XM is firmly in a position to implement an ongoing quarterly dividend program.
John Malone Wants His Money Back
John Malone, the billionaire chairman of Liberty Media (LMCA) was the driving force behind Sirius XM's rescue in 2009. At a time when the global lending markets were frozen and Sirius XM was only days away from bankruptcy, Liberty Media loaned the company $530 million in exchange for a 40% equity stake. It was a bittersweet deal for Sirius XM shareholders, but it was arguably their only choice. Through a series of legal loopholes and a further substantial equity investment in Sirius XM, Liberty Media took de-facto control over the company in 2012. But now, John Malone wants some of his money back.
Mr. Malone has been vocal in his assertions. In July 2012 he stated "If we have to spend our money to go from 40% to 50%…we'd like to get that capital back." With the large share buyback and special dividend, Liberty was able to recoup a large part of its expenditure, but there is absolutely no reason to expect the company will stop there. Liberty CEO Greg Maffei has recently stated that Sirius XM should take on more debt in order to, in part, help fund future distributions.
With these words, it seems that the writing is pretty much written on the wall. Shareholders should not be worried about if Sirius XM will announce a dividend, but rather, when Sirius XM will announce the implementation of a quarterly dividend program.
Cash Is Flowing
Another factor which must be considered is Sirius XM's massive cash flow generation in the last quarters, as compared to their capital expenditures. The chart below shows Sirius XM's net operating cash flow as well as their capital expenditures.
It's always a beautiful thing to see. As net operating cash flow has almost doubled since 2009, Capital expenditures have dropped by more than half. In 2013, a year which is not shown in the chart, the numbers only get better.
A massive cash flow is something which few companies can brag about, and it's an enviable problem to have. Sirius XM has been storing away a large portion of the cash on its balance sheet, and has accumulated more than $700 million so far. This is more than enough cash for the company to have on hand for any foreseeable capital expenditures. Furthermore, given its debt level, stock price, and the current rock-bottom financing costs, Sirius XM would have ample resources available if it wanted to make a major acquisition in the future. There is just no good reason for the company to continue stockpiling cash.
The company fundamentally has two main options. Sirius XM can either use its cash to buy back shares on a massive scale, or it can institute a quarterly cash dividend. Either one of these options would be applauded by shareholders, but one option is more likely than the other.
In terms of a share buyback, Sirius XM already announced a buyback in 2012 worth $2 billion. In October 2013 Sirius XM announced a further buyback worth an additional $2 billion including a specific agreement to repurchase shares worth $500 million from Liberty Media. The company stated that the repurchases would be completed in installments, happening in November 2013, January 2014, and April 2014. But what happens after that? The share repurchases, amounting to about 10% of the company's outstanding common shares will likely continue to push shares higher. This will be fantastic for Sirius XM shareholders, but, for the company itself, there will likely be a point when shares become too overvalued to justify a continue buyback.
For this reason, Sirius XM will have to institute a dividend program. The program will likely start small, with quarterly payments, and then rise as cash flow continues to increase. The program will please Liberty Media, as they are the largest shareholder. Furthermore, Sirius XM will still be free to use any excess cash to buy back shares on the open market as conditions permit. The likely continued share buybacks will also force Sirius XM to raise the dividend payments regularly even if it simply wants to maintain a constant nominal dividend distribution.
Following in Sirius XM Canada's Steps
If you have been fortunate enough to be an investor in Sirius XM's sister company, Sirius XM Canada (XSR), for the last few years, then you have not only experienced a dramatic increase in share value, but also a nice little dividend kicker. Yes, Sirius XM Canada has been paying an 8.25 cent quarterly dividend since late 2012, and recently announced it was increasing the payment 27% to 10.5 cents per quarter.
"We believe the primary motivation for the fairly high payout ratio is the cash balance."
Canaccord Genuity analyst Aravinda Galappatthige speaking of Sirius XM Canada Holdings Inc.
The cash dividend was higher than many shareholders expected and analysts presumed that the high payout ratio (about 80%) was due to the fact that the company had too much cash on its balance sheet. Keep in mind that Sirius XM Canada had a total cash balance of $52 million in 2012, with analysts projecting that to increase to $60.7 million at the end of 2013. Compare that to Sirius XM which is expected to have cash on the balance sheet of almost $1 billion within the next few quarters.
Sirius XM will see continued cash flow growth in the quarters and years to come. The cash accumulating on the balance sheet will continue to be used for share buybacks, but it is likely that the company will also institute a dividend program within the next few quarters. Liberty Media, Sirius XM's controlling shareholder is eager to see a return on its investment and this driving force to return value to shareholders will benefit all Sirius XM investors. Between the strong growth driving the share price higher and the forthcoming dividend policy initiation, Sirius XM certainly makes for a great stock to own.
Disclosure: I am long SIRI. 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.