No. of Recommendations: 8
kicks off over $1B of FCF that historically goes towards buybacks. Currently they're going through a cap ex cycle so not enough cash for major repurchases, but end of next year company signaled that will return to more meaningful buybacks.
What gives me pause is that there is a circularity that worries me. I guess the expectation is that, without buybacks, Sirius' earnings per share will decline, not rise, correct? Buybacks are economically sensible if you want to buy those shares because they offer good prospects, same as anybody else. If, absent the buyback, it's not a company worth buying, then it's not worth their while doing buybacks. The fact that they might do buybacks can not itself be the rationale for doing buybacks. They should allocate that capital to the shares of a firm that is attractive, or something else.
Phrased another way, yes, cash generated from operations allocated to buybacks can increase the earnings per continuing share. But they're only reported earnings, not useful profit: if (for so long as) earnings are being directed to buybacks, they can't be distributable owner earnings. You can't count the same money twice. Either you could get the earnings, or the earnings per share rise, but not both.
I've had the same thought getting my head around the attractions of Davita, too. Net sales and profits are unchanged in the last decade, and there has been no dividend. There have been lots of buybacks, but I have to ask myself, to what end? If the money is forever used for buybacks, it's forever not owner earnings. To overgeneralize, if they stop doing buybacks, the revenue and profit per share seems likely to be flat, since that's what is happening at the top level, so it's not that attractive a firm by the reasoning above. If a random person would not pay much for shares in a firm with flat per-share results, why should that firm be willing to do so?
Here's a thought experiment defying the institutional imperative: what if in the last decade, with Davita's flat revenues and profits, they had instead used those profits to buy shares of QQQ instead of shares of DVA (same question for SIRI)? What would a share now be worth measured as "market value of investment per share plus 10 times net operating profit per share"? A multiple of only ten because the operating business is merely a cash cow. Does Sirius' main business have any similarities to Berkshire Mills, and would it respond better to the same solution? I'm not saying either firm would or should adopt that approach, but if the results would have been better deploying that capital in another way, then maybe the current way is not so smart.
This description is a bit of exaggeration, as the current strategy of each firm can make sense if the shares are dirt cheap (cheaper than fair price for a piece of a moribund underlying business), and the firms are not dead yet. But it shows the circularity issue. Even giant buybacks won't fix the issues of a ho-hum business.
Yours confused,
Jim
