Share repurchases, put on hold during the pandemic, are poised to make a big comeback as cable companies look for places to put their huge stockpiles of cash to better use, according to one influential analyst.
In a research report, MoffettNathanson principal and senior analyst Craig Moffett wrote that with broadband growth slowing, capital intensity waning and share valuations low, cable operators will likely focus on returning cash to shareholders through stock repurchases.
Moffett noted that cable is at a unique point in its capital cycle — large-scale infrastructure investments are pretty much no longer needed, margins are rising and major industry consolidation is a thing of the past.
“The entire cable industry is now in harvest mode,” Moffett wrote.
Most analysts believe that broadband growth will slow in the next few years after a record 2020. But the key is that growth is expected to slow, not stop. And while slower growth would be a problem for the stocks if their valuations were high, that is not the case in the cable industry, where public stocks have been trading well below private deal multiples.
The combination of low multiples, rising margins and declining capital intensity leads to a “geyser” of free cash flow (cash flow after interest payments and capital expenditures are made), Moffett wrote, which then can be used to repurchase shares.
Share repurchases have been a popular vehicle to return cash to shareholders for years. According to Moffett, Comcast has bought back about 17% of its outstanding stock in the past 10 years, while Charter has reduced its outstanding stock by 34% since closing its Time Warner Cable purchase in 2016 and Altice USA has repurchased about 37% of its outstanding stock since splitting off from Altice N.V. in 2018.
But in the past two years, repurchases have declined due to a desire to pay down debt and uncertainty surrounding the pandemic. Comcast, which had been buying back an average of $4 billion to $5 billion worth of shares annually prior to the pandemic, stopped its repurchase program in 2019 as it focused on paring down debt associated with its purchase of British satellite company Sky.
Comcast’s goal was to reduce its leverage ratio to about 2.5 times cash flow from about 3 times at the time. Comcast has said it expects to reach that target by the end of 2022. As of March 31, Comcast’s leverage ratio was at 2.7 times.
During its first-quarter 2021 earnings conference call with analysts, the company said it planned to restart that buyback program in the second half of the year. At the JP Morgan Global Technology, Media and Communications conference in May, Comcast chief financial officer Mike Cavanagh said the repurchase program was restarted that month.
Cavanagh said at the conference that Comcast would repurchase stock at about the same pace it had before halting the program, which has averaged between $4 billion and $5 billion per year. Given the huge amount of cash the company is generating, though, that won’t be enough, Moffett wrote.
By Moffett’s estimates, Comcast is expected to generate about $16 billion in free cash flow in 2022, $18.6 billion by 2023 and $24 billion by 2025. Given average annual operating cash flow increases of about 7.6% over the next five years, even spending all of its free cash flow on stock repurchases won’t be enough to keep leverage at 2.5 times.
In his report, Moffett estimated that if Comcast indeed wants to keep its leverage ratio at 2.5 times, it would have to spend all of the free cash flow it generates plus 2.5 times in each year’s EBITDA growth.
“Based on our estimates, and assuming that they increase their dividend by 10% per year, by 2025 they would need to buy back more than $90 billion of stock, an amount roughly equal to 34% of the company’s current market cap,” Moffett wrote.
He estimated that over the past 10 years, Comcast has returned about $60 billion in capital to shareholders — $33.1 billion in buybacks and $27.2 billion in dividends.
Moffett was quick to add that Comcast has not said what it intends to do after 2022 regarding repurchases, and analysts’ consensus estimates predict the company to spend between $8 billion and $9 billion per year buying back its stock. Moffett’s estimates are nearly double consensus estimates at $15 billion to $16 billion. But even at that level, the analyst pointed out that it still falls short of consuming all the cash Comcast is expected to generate.
“Our forecast for repurchases — again, roughly 2x consensus — represents an 11% decrease in shares outstanding (net of shares issued under employee plans) by 2025, still only a fraction of what they could do,” Moffett wrote.
Moffett admitted that there are a lot of other things Comcast could do with the money, and speculation has been high it will seek out a major acquisition, despite the company’s claims to the contrary. But consolidation has largely already happened in the industry, and any future deals are expected to be small ones. In addition, the market, Moffett wrote, would prefer share repurchases or a separation into two separate stocks -- an idea other analysts have floated in the past -- and then even more buybacks.
“Indeed, one can argue that share repurchases are more than just a ‘niceto have,’” Moffett wrote. “Given where Cable is in its life cycle — slowing growth, rising free cash flow — this is arguably the only appropriate strategy, at least from the perspective of institutional investors.”
Others, like Charter and Altice USA, have maintained or even increased their buyback pace, but are poised to step on the accelerator in 2022 and beyond.
According to Charter’s 10-K annual report, it bought back about 21 million shares of its stock in 2020 for about $12 billion, up about 55% from the 19 million shares it repurchased for $7.8 billion in 2019. The dramatic rise in Charter’s stock price over the periods was a big factor in the amounts spent on repurchases — between Jan. 1 2019 and Dec. 31, 2020, Charter stock rose from $284.97 to $661.55, or about 132%. So far this year, Charter stock is up about 7.4%.
Charter is different from Comcast in that its current leverage ratio of about 4.4 times is within its targeted range of between 4.0 and 4.5 times cash flow. But even if it decided to pare its debt just a bit more, Moffett noted it could substantially increase its repurchases.
“If Charter were to manage to the midpoint of their target leverage range (4.25x EBITDA), our model would imply share repurchases of $66 billion over the next five years, a sum equal to 47% of today’s market cap,” Moffett wrote.
Moffett predicts that Charter will spend a little less, about $58.6 billion, on buybacks by 2025, adding that the cable company is not prioritizing capital returns over capital investments. Its participation in the RDOF auction is evidence of that, and the company has said that it would like to own more cable.
But again, the number of deals available are small given Charter’s size. As the No. 2 cable operator in the country, it has about 16 million video customers and 29 million broadband customers.
“So cash return not only looks like the best use of capital for Charter… it also looks like the most likely,” Moffett wrote.
Altice USA has made some small acquisitions — it bought Morris Broadband in April for about $310 million and Service Electric Cable TV of New Jersey in July 2020 for $150 million — while pulling the plug on larger deals like its abandoned joint $8 billion bid for Atlantic Broadband parent Cogeco Communications in November.
While the operator says M&A is still in the mix, Moffett believes that it won’t be big enough to affect capital returns to shareholders.
That’s because Altice has been an aggressive buyer of its own stock — it repurchased about $7.5 billion worth of shares since 2018 — and its valuation multiple is low. In addition, Altice has said it would prefer buybacks to paring its debt. Its leverage is currently at about 5.5 times, just short of the targeted 4.5-to-5 times, and Altice believes its stock is cheap.
Altice has only guided its repurchase intentions in the short term and has said it plans to buy back about $1.5 billion of its shares in 2021. Moffett estimates it may buy back about $1.6 billion worth of shares this year, but noted that taking leverage down to about 4.75 times would imply a buyback potential of more than $11 billion through 2025.
