Pay-TV Stock Buybacks Please Analysts
Pay-TV distributors have been buying back stock at high rates in recent years, and more companies are taking up the strategy. The reliably high levels of free cash flow generated by the pay-TV industry, and lack of opportunity and desire for companies to spend their cash on large acquisitions is leading more companies to invest in their own stock, analysts said. Buying back stock can also make it easier for a company to go private, they said.
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Before Mediacom’s board accepted CEO Rocco Commisso’s buyout offer, the company had reduced its float about 50 percent since the first half of 2007, before the credit crisis and ensuing recession began, according to SEC filings. During that period, DirecTV bought back about 32 percent of its shares, SEC filings show. Other operators, such as Comcast and Cablevision, have bought back chunks of certain classes of shares.
Time Warner Cable recently announced a $4 billion share repurchase authorization, representing about 18 percent of its market capitalization at current stock prices. And earlier this year Cablevision’s board authorized a $500 million stock buyback plan. It’s not just domestic operators that are buying back shares. Through Sept. 10, Liberty Global had bought back $787 million in shares this year and that day added the capacity to buy back another $212 million in shares. In Canada, Rogers has been buying back shares regularly through private transactions.
Investors tend to like buybacks for various reasons: They create demand for the shares in the market, increase earnings per share and return cash to shareholders in a way that incurs fewer taxes than a dividend. Companies like it because they're able to maintain their ideal amount of leverage, lowering their cost of capital, analyst said. “The reason investors want it and the reason the companies are doing it, is they have excess free cash flow and they want to return to shareholders and optimize their capital structure,” said Bryan Kraft, an analyst with Evercore Partners.
Buying back stock also represents a good investment for companies, said Sanford Bernstein analyst Craig Moffett. “It’s hard to find another source of capital deployment that can deliver free cash flow yields in the 10-14 percent range,” he said. “Historically, cable operators have looked to make acquisitions in order to grow, but at some level a management team and board of directors has to compare the potential returns from outside acquisitions to the potential returns from buying back their own stock."
But buying back stock means companies will have less capital available for financing acquisitions if they change their strategy, Kraft said. “There is an opportunity cost,” he said. But the buyback trend should continue in 2011, he said. “They have excess free cash flow, they have leverage targets or leverage capacity beyond the leverage they have today, so they've got to do something with their cash,” he said. “I don’t see why that’s going to change next year."
Cable doesn’t present many acquisition opportunities, Moffett said. “If there were a major cable operator for sale, there would be a line around the block to buy it,” he said. “But there’s just nothing for sale.”