As was expected, Sirius XM (NASDAQ:SIRI) announced the board had authorized an increase to the company's share buyback program by another $2 billion after the market close on Wednesday. This is the third such $2 billion increase, bringing the total amount authorized to $8 billion. The first $2 billion announcement took place in December of 2012, although the company did not begin buying shares until after full year 2012 earnings were announced in February of 2013. In that earnings release the company stated:
As SiriusXM commences its previously announced $2 billion share repurchase program, the Company expects to repurchase shares of common stock from time to time on the open market and in privately negotiated transactions.
The current press release is quite similar to the previous $2 billion increases, including the following statements:
Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions, including in accelerated stock repurchase transactions and transactions with Liberty Media and its affiliates. The Company will fund the repurchases through cash on hand, future cash flow from operations and future borrowings.
As noted above, the increase should come as no surprise. In the most recent 10Q the company noted that (Note that 10Q share and dollar amounts are expressed in thousands):
As of June 30, 2015, our cumulative repurchases since December 2012 under our stock repurchase program totaled 1,547,431 shares for $5,379,148, and $620,852 remained available under our stock repurchase program.
The same 10Q, under "Subsequent events", noted:
For the period from July 1, 2015 to July 24, 2015, we repurchased 47,317 shares of our common stock for an aggregate purchase price of $179,199, including fees and commissions, on the open market.
The two purchase figures brought the total to $5.56 billion, leaving just $440 million left under the authorizations, and it was reasonable to assume that further purchases had continued through August.
In prior statements about leverage and the pace of the buybacks, CFO David Frear had this to say:
We've had this discussion target of times, certainly comfortable four times the -- we would -- you could run this company with more leverage if you wanted to, but we think that compromises flexibility for opportunities since they arises, which we just -- when you get it's important to keep some power dry for these strategic opportunities [technical difficulty] from time-to-time.
In terms of the size of the buybacks, something in this range of 2-2.5 billion years probably a pretty sustainable level of buyback activity that we continue to believe that [indiscernible] value which is one of the reasons why we continue to buy, but we're not in a rush to buy.
Frear is essentially saying that the company is comfortable with a leverage target of four times EBITDA. 2015 EBITDA is projected at $1.62 billion and debt as of Q2 was $5.15 billion. That puts the projected leverage at just 3.12 times. The company also had nearly $300 million in cash.
The company is also projecting Free Cash Flow of $1.3 billion for 2015 (ignoring the $200 million settlement with the record labels). To accomplish the $2-$2.5 billion pace of buybacks, we can expect to see the company initially draw down its revolver and eventually return to the debt markets and borrow another $1 billion. I would expect the rate to be somewhat higher than the 5.375% rate on the $1 billion borrowed in early March.
Note the language in the press release about funding. It states "The Company will fund..." rather than state "The Company may fund..." with cash on hand, funds from operations and future borrowings. Whether the future borrowings only refers to drawing down the revolver or is meant to communicate a new bond issue could be debated. However, based on Frear's comments, the current interest rate environment, and the expectation of a rate hike by the Fed, I would expect to see Sirius return to the debt market before the end of the year.
Yesterday, in a comment on a recent article I was asked:
Is whoever running the buybacks able to take advantage of the lower price these past few days or is there some predetermined purchase plan that is not affected by the daily price fluctuations? Basically can they load up on buying back shares now that they can get them much cheaper?
My answer, in part, was,
I'm not sure how much latitude there is, but there are insider buying restrictions that could place limitations. That said, I believe that there can be instructions based on preset algorithms to increase or decrease the pace based on movements in the share price.
The press release notes essentially says the same thing:
Repurchases will be made in compliance with all SEC rules and other legal requirements and may be made in part under a Rule 10b5-1 plan, which permits stock repurchases when the Company might otherwise be precluded from doing so.
The reply had also noted that the company was running out of dollars under its current authorization.
For those investors that are fans of debt funded share buybacks and Sirius leveraging up the balance sheet, the news of the additional $2 billion authorization would be considered good news. I am not one of them. I prefer a debt free company that is exploring avenues for growth. And, without the buybacks, Sirius would be debt-free by this point.
Instead, interest expense was $75 million in Q2. That's an annual run-rate of $300 million. With incremental debt to fund additional buybacks, we can expect to see interest expense rapidly heading above $350 million. That's more than the company spends on content.
By devoting so much debt and effort to buying back shares, the company is sending me a message that growth is limited, and the best way to increase EPS is by reducing the share count. That's not the best path to a sustained growth rate.
Disclosure: I am/we are 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.
Additional disclosure: In addition to my long positions, I have January 2016 $4 covered calls written against a portion of my long positions and January 2016 $4.50 covered calls written against a majority of my long positions in Sirius XM. I also continue to make frequent short term trades on large blocks of Sirius XM on a regular basis. I may close the current call positions, open new call positions or buy or sell large blocks of Sirius at any time. I hold no positions, nor do I have any plans open any positions, in any other company mentioned in this article.
