Why Buffett Repurchased Shares Of DirecTV

| About: AT&T Inc. (T)
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Summary

It is interesting that Warren Buffett reduced his stake in DirecTV during Q2, but increased it by 28% during Q3, after the announcement of the takeover by AT&T.

This article calculates the profit for DTV shareholders for different moves in AT&T's stock price.

The results show that there is significant profit to be made in the next six months, with great downside protection.

DirecTV shareholders will start losing money only if AT&T declines more than 10%, i.e., below $30.

DirecTV (NYSE:DTV) has traded in a very tight range, $82-$88, in the last 6 months thanks to the pending completion of the announced takeover by AT&T (NYSE:T). It is interesting that Warren Buffett reduced his stake in DTV during Q2, but increased it by 28% during Q3, after the announcement of the deal. The important question is whether investors should follow Buffett in this move.

As per the terms of the deal, as long as AT&T stock is between $34.90 and $38.58 when the deal is completed, DirecTV shareholders receive $28.50 in cash and $66.50 in AT&T stock for every DTV share they own. This means they will receive $95 for every share of DirecTV they own, as long as T is in the $34.90-$38.58 range. If T is below $34.90, they will receive 1.905 shares of T plus $28.50 in cash. If T is above $38.58, they will receive 1.724 shares of T plus $28.50 in cash.

First of all, when you consider investing in a takeover, the most important issue is to assess whether the deal will eventually be executed, otherwise you run the risk of incurring a great loss instead of making a small profit. However, in the case of the above deal, DirecTV recently announced the extension of the rights to carry NFL Sunday Ticket for eight more years so AT&T cannot walk away from the deal. The only factor of uncertainty is the pending approval by regulators, who will review the impact of the deal on the competition in some regions and thus on the consumer price. However, AT&T has taken important steps on this, therefore the deal is considered to be almost risk-free.

As a side note, even if the deal is cancelled, DirecTV is trading at just 14 times its current earnings per share (EPS), which means that it is not expensive by any means. In addition, taking into account its exceptional EPS growth (six-fold) in the last five years, its shareholders should feel secure even in the very unlikely event of a cancellation of the deal. Moreover, the company has paused its aggressive share repurchases due to the pending deal. An additional boost would be provided by the continuation of those repurchases if the company were not to be acquired.

To evaluate the prospects of DirecTV shares at their current price (85.47), it is important to calculate the profit for every possible move of the AT&T stock price within the next 6 months, as the deal is expected to close within that timeframe. AT&T is characterized by very low volatility (beta=0.18), which makes the evaluation easier. To be sure, the stock has moved in a very tight range in the last three years, between $30 and $39. Therefore, I calculated the impact of a move of AT&T from -10% up to +10% in the next 6 months, from its current price of $33.54. The results are summarized in the table below:

AT&T price move

DirecTV final price

% profit for DTV shareholders

Annualized % profit for DTV shareholders

-10,0%

86,00

0,6%

1,3%

-7,5%

87,60

2,5%

5,1%

-5,0%

89,20

4,4%

8,9%

-2,5%

90,80

6,2%

12,9%

0,0%

92,39

8,1%

16,9%

2,5%

93,99

10,0%

20,9%

5,0%

95

11,2%

23,5%

7,5%

95

11,2%

23,5%

10,0%

95

11,2%

23,5%


The table shows there is significant profit to be made (8.1%-11.2% in six months or an annualized 16.9%-23.5% profit) if T is not lower than its current price at the time that the deal is completed. Moreover, even if T declines up to 10% from its current price, DTV shareholders will still make a profit. Please note - a 10% decrease of AT&T in the next six months is considered as a worst-case scenario because the level of $30 is its three-year low. Of course the stock may go even lower, but only in a general market sell-off. In this case, DTV shareholders would still greatly outperform the market, as they would start recording losses only after the first 10% decline had been realized.

To sum up, in today's fully-valued market, investors can make a significant profit by purchasing DTV at its current price, with exceptional downside protection. Therefore, it makes sense that Buffett increased his stake in DTV during Q3 even though he had reduced his stake in Q2 at a lower price. As Buffett hates to sell low and buy high, he must have had great conviction now that he increased again his stake in DTV.

Disclosure: The author is long DTV.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.