Even Wall Street can have too much of a good thing.
Investors are begging big media to stop using mountains of cash to buy back stock and instead get busy and do some deals — or else pay bigger dividends.
Time Warner has obliged, putting in a second bid for Dutch TV giant Endemol on Monday, this time all in cash after the first mixed cash-and-stock offer was rejected.
There have been only two major deals this year: News Corp.’s acquisition of Shine Group and Scripps’ purchase of UKTV. But the five biggest media companies — TW, News Corp., Walt Disney, Viacom and CBS — will buy $15.5 billion worth of their own shares in fiscal 2012, predicted Evercore Partners’ Alan Gould.
That’s up from an estimated $12.5 billion this year and reps a major chunk of the combined companies’ circa $200 billion in market capitalization.
Management buys up stock when company honchos think it’s cheap or undervalued. If the shares have already rallied, if they’re overvalued or heading lower, that’s not so good. Repurchases assume “CEOs are better than anyone else” at knowing where the stocks are heading, Gould said.
Buybacks, in fact, “have the potential to destroy shareholder value if shares are purchased above intrinsic value, a legitimate risk in the context of an uncertain macro environment,” wrote Anthony DiClemente of Barclays Capital in a note to clients. The U.S. economy has been shaky, battered by woes in Europe and at home and with little visibility for advertising or much else.
DiClemente wants media congloms to make strategic acquisitions — of international assets in particular. Companies have access to cheap financing, the dollar is getting stronger, and buying new assets could boost sluggish revenue growth.
“It’s no secret that the media sector has a dubious record when it comes to M&A,” DiClemente acknowledged. But the disastrous AOL-Time Warner, Viacom-CBS and Vivendi-Universal deals happened a decade ago. The analyst said it’s time to get back in the game.
Repurchasing stock reduces the number of shares outstanding and boosts earnings per share. DiClemente noted that management compensation is sometimes tied to earnings per share. Also, since investors generally like stock buybacks, a company’s share price usually rises when one is announced. That’s a boon for execs who hold lots of stock options.
Media investor Chris Dixon said a program of regular stock buybacks that monitors the market and can jump in to take advantage of dips is a good idea. But it becomes a problem when they are “used as excuse for not taking action … when companies are unwilling to invest in new ventures.”
If there’s nothing around to buy, congloms could invest in their current businesses.
“That ‘there’s too much money around and nothing else to do with it'” isn’t a good motivation for buying back stock, Dixon said.
The other main way to return cash to stockholders is through dividends, which aren’t “accretive” to earnings per share but do give investors back some cash on a regular basis. Analysts today would prefer dividend hikes to more buybacks.
Most media companies have also raised their dividends. But buybacks have accelerated much more quickly. DiClemente noted that in 2009, dividends made up 67% of total capital returns, but in 2011, only an estimated 15% will be from dividends — vs. 85% from share repurchases.
Dividends can leave management with less flexibility, however. Once you raise a payout it’s hard to cut it without investors making a stink and the stock taking a hit.
Viacom CEO Philippe Dauman said last week at a media conference that Viacom would return $20 billion to shareholders over the next five years — a mix of buybacks and dividend payments that he didn’t break out. DiClemente figures Viacom will have bought back 11% of its market cap in 2012, at the high end of the group. Under its existing program, it’s authorized to buy back as much as 28%.
Share buyback programs, which lay out the amount of stock management is authorized to purchase over a given time, are approved by a company’s board of directors.
Disney acquired $5 billion worth of stock in fiscal 2011.
CBS last week announced an additional $1.5 billion buyback on top of its ongoing program under which it acquired $850 million in shares this year as of Sept. 30.
News Corp. is buying back $5 billion — some of the cash that’s sitting there after the conglom gave up its bid for BSkyB.
Time Warner, which has the highest dividend yield in the group, acquired $3.7 billion in stock this year through the end of October under a $5 billion program.
Time Warner Cable announced a $4 billion shares repurchase last month.