eBay's Sale of StubHub Allows It to buy back $4.5 Billion of Its Shares in 2020
On February 13, 2020, eBay (NASDAQ:EBAY) closed on the sale of StubHub. It received a net of $3.1 billion. eBay immediately issued a press release saying it would use the proceeds to buy back $4.5 billion in shares during 2020:
Source: 2-13-20 Press Release
Since EBAY stock has a $29.6 billion market value, the $4.5 billion in buybacks this year gives the stock a buyback yield of 15.2%. To be conservative in my modeling of EBAY stock, I have assumed that the buybacks will be at the average for the past 8 quarters. More on this below.
Here is the bottom line: In 2 years, EBAY stock will be worth 50% more based on these massive buybacks and the company's FCF. I will show you how I derive this model. But first, let's look at what EBAY has been doing with buybacks.
EBAY Has a History of Large Buybacks Based on Its Huge Free Cash Flow Generation
EBAY has been on a buyback binge. This is based on the massive amount of free cash flow ("FCF") it has been generating. Look at the table below, where you can see the last 12 months ("LTM") history of its FCF generation:
Source: Hake calculations
This chart shows that on a rolling quarterly LTM basis, EBAY has been producing over $2 billion annually. In fact, in the last several quarters its FCF generation has been over $2.5 billion annually.
Now, since the market value of the stock is just $29.6 billion, that means its FCF yield is now over 8.6%. In addition, EBAY has begun paying a dividend in the last 4 quarters. It started out at $0.14 per quarter, and just raised the dividend to $0.16 per quarter. So that gives the EBAY stock a prospective dividend yield of 1.72% (i.e. $0.64 dividend per share / $37.19 stock price).
So the total yield is now between 16 and 17% annually. That is derived from the 15% buyback yield and the 1.72% dividend yield.
Source: Hake estimates
Source: Hake
As I said above, I estimate that the annualized buybacks will be the average of the past 8 quarters which is $1.067 billion.
Source: Hake calculations
EBAY Has Dramatically Cut Its Shares Outstanding
Here is the result of all these buybacks. EBAY has cut its shares outstanding by one-third in the past three years:
Source: Hake calculations
This is amazing. There are only a few companies, like Apple (AAPL) that have such an aggressive buyback program. And just since some always asks, yes, this includes the small number of shares that the company issues to employees. This is the net result of the buybacks.
That is important since it will allow us to estimate the value of the company going forward.
But first, let's look at how EBAY has paid for this.
EBAY Has Used Its Net Cash and Net Debt to Pay For the Share Reduction
As you can see in the second chart above, there is a deficit between the amount of FCF EBAY generates and its buybacks. In fact, if you look at the dividends and debt paid down, the net deficit has increased.
Source: Hake calculations
It is easier to see this in chart form. The first chart below shows the total uses of EBAY's FCF in the past several years, by quarter:
Source: Hake calculations and formulation
So, as a result, the net deficit has increased. But EBAY has paid for this deficit by reducing its net cash and increasing its net debt.
Source: Hake
So you can see that the net deficit of $8 billion has been roughly paid for by the increase in debt.
Source; Hake calculations
So, as a result, the company has drawn its net cash balance of $2.3 billion in Q3 2017 and increased borrowing so that now it has a net debt balance of $3.59 billion. Note this includes its long-term investments. In other words, adding up all its long-term stakes in other companies, plus marketable securities plus cash, less total debt outstanding, results in a net balance of $3.59 billion as of Q4 2019.
So you can see that the asset sale of $4.05 billion for StubHub on Feb 13, 2020, which resulted in net cash of $.1 billion effectively eliminates the net debt balance.
But, as EBAY made clear, they are going to use all those proceeds to buy back $4.5 billion of shares in 2020.
Why are they doing this? What do they think will be the result? We can model this out.
Estimating the Value of EBAY Stock With Its Buybacks
We can derive a simple model using existing trends. It is very simple. There are three steps: (1) Calculate how many shares will be outstanding in two years based on existing trends; (2) Calculate the market value based on its expected FCF in two years, and (3) Divide the market value by the new lower number of shares in two years. Here is the result.
Source: Hake calculations
Note the bottom line is that the shares outstanding will be lower by 25% in 2 years, even if the stock price rises 10% per year each year.
Next, we estimate the market value of the stock and divide that value by the new lower number of shares outstanding:
Source: Hake calculations
This model says, based on the annualized FCF in Q4 2019 time 4, there will be $2.688 billion in annual FCF generated by the company each year. Then, we divide that number by today's FCF yield, which is 8.65%. But I decided to improve that yield by at least 5% since the market will likely value the stock more by 10% each year. This brings the yield to 8.04%. That results in a new market value of $33.4 billion. This is 12.9% higher than today's market value of $29.6 billion.
Now we can take the third step. Dividing $33.4 billion, by the new 25% fewer number of shares outstanding in two years (596.8 million) results in a stock price of $56.00 per share. That is 50.6% higher than today's price.
So this is a simple model which shows why management is so aggressive in buying back its shares. It expects to return significant value to shareholders in a very short period of time by doing this.
Summary and Conclusion
eBay is aggressively buying back its shares. It is doing $4.5 billion a year. Based on its $29.6 billion market value that represents over 15% in buyback yield. Adding in the 1.72% dividend yield results in a total yield of over 16%.
I have shown that the stock is worth $56.00 per share, based on this buyback model. That is a potential expected gain of over 50% for EBAY stock.
If you liked this article, click on the like button (and the follow-on real-time alert for future articles).
Total Yield Value Guide
Extensive financial analysis of high total yield and deep value stocks
The Total Yield Value Guide follows high dividend yield, and high buyback stocks (total yield) and stocks with abundant net cash, cash flow, and catalysts. Our focus on high buyback yield stocks (buybacks/market price) plus high dividend yield is unique. These stocks tend to perform well over time.
Subscribers receive exclusive articles, model spreadsheets on stocks published both here and on other sites, access to my historical articles and a chat room.
Subscribers also receive a free two-week trial to review the service.
Here is the link to subscribe.
