Over the past two years, there hasn’t been a hotter investment trend than the rise of artificial intelligence (AI). But in 2024, stock-split euphoria has played a very close second fiddle.
A stock split is a tool publicly traded companies have at their disposal that allows them to superficially adjust their share price and outstanding share count by the same factor. Splits are surface-scratching in the sense that changing a company’s share price and share count by the same magnitude has no impact on its market cap or operating performance.
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Stock splits come in two varieties, with investors unquestionably gravitating to one more than the other.
On one end of the spectrum are reverse splits, which are designed to increase a publicly traded company’s share price, often with the purpose of ensuring it continues to meet the minimum continued listing standards of a major stock exchange. Investors typically avoid this type of split since it’s usually conducted by struggling/underperforming businesses.
By comparison, investors have been lining up to buy shares of companies enacting forward splits. A forward stock split lowers a company’s high-flying share price to make it more nominally affordable for everyday investors who lack access to fractional-share purchasing with their broker. This is the type of split executed by companies that are out-innovating and out-executing their competition.
Since Walmartkicked off stock-split mania in late February, more than a dozen brand-name businesses have followed in its footsteps — and Wall Street’s most-successful billionaire money managers have taken notice.
But perhaps the biggest surprise of all is that one of the most popular buys for billionaire money managers has been Wall Street’s most prominent reverse stock split of 2024.
Despite their different investment strategies, Berkshire Hathaway‘s Warren Buffett, Millennium Management’s Israel Englander, and Point72 Asset Management’s Steven Cohen are all highly successful billionaire money managers. But they all share one common link in their respective portfolios: shares of satellite-radio operator Sirius XM Holdings(NASDAQ: SIRI).
In December 2023, Sirius XM announced plans to merge its common stock with that of Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group. Although Liberty Media held a greater than 80% stake in Sirius XM, its three classes of Sirius XM tracking stock never did a particularly good job of matching the return of Sirius XM shares. Not mention, having so many classes of shares were confusing to retail investors.
Following the close of trading on Sept. 9, Sirius XM’s common stock and Liberty Sirius XM Group’s three classes of shares were merged to create a single common share class in what the company referred to as “New Sirius.” This merger put an end to whatever arbitrage opportunity may have existed between Sirius XM’s common stock and Liberty Sirius XM Group shares.
Equally important, Sirius XM’s board announced plans in June to conduct 1-for-10 reverse stock split following the completion of its merger (also after the close of trading on Sept. 9). What made this split unique is that, unlike most reverse splits, Sirius XM’s stock was in no danger of delisting from a major stock exchange.
The purpose of this reverse split was to increase the company’s share price from the low-to-mid single digits, which is where it had spent the last decade, to a level that would attract interest from asset managers who sometimes avoid stocks trading below $5 per share. Going from the mid-$2’s to the mid-$20’s certainly accomplished this task.
Berkshire Hathaway’s CEO Warren Buffett has been an avid buyer of Sirius XM stock. Image source: The Motley Fool.
Based on 13F filings from the June-ended quarter, Warren Buffett’s Berkshire Hathaway piled into shares Sirius XM and two separate classes of Liberty Sirius XM Group. Meanwhile, Englander’s Millennium Management and Cohen’s Point72 Asset Management scooped up a split-adjusted 1,698,711 shares and 454,360 shares, respectively.
The reason these billionaire money managers want to own shares of Wall Street’s most-popular reverse stock split is because of its clearly defined competitive advantages, as well as its historically inexpensive valuation.
Although Sirius XM is constantly fighting for listeners with traditional and online radio providers, it’s the only licensed satellite-radio operator. Holding this unique distinction affords the company outstanding pricing power on its subscriptions.
However, an even more important differentiating factor for Sirius XM has been the way it generates sales. Traditional radio operators are almost exclusively reliant on advertising revenue to keep the lights on. While lengthy periods of economic expansion are beneficial to ad-driven operating models, terrestrial and online radio providers can struggle mightily during recessions.
By comparison, Sirius XM brought in 20% of its net sales in the September-ended quarter from advertising (via Pandora) and close to 77% of net revenue from subscriptions. A predominantly subscription-driven model leads to more consistent operating cash flow in any economic climate. If a recession were to occur, Sirius XM is in far better shape than traditional radio operators to navigate it.
Investors also get a degree of predictability on the cost side of the equation with Sirius XM that simply doesn’t exist with terrestrial and online radio providers. Though royalty and content costs will ebb-and-flow on a quarterly basis, Sirius XM’s transmission and equipment expenses are relatively fixed no matter how many new subscribers it onboards. In theory, this sets the company up for a higher operating margin over time.
SIRI Dividend Yield Chart
Sirius XM’s board appears determined to maintain its aggressive capital-return program, as well. In addition to occasional stock buybacks, the company is doling out $0.27 per share each quarter in dividends, which works out to a 4.1% annual yield. Warren Buffett is an especially big fan of robust capital-return programs.
The cherry on the sundae for Sirius XM is its remarkably cheap valuation. Shares can be picked up right now for about 8.5 times forward-year earnings. This is just a stone’s throw away its all-time low forward-earnings multiple in 30 years as a publicly traded company.
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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Berkshire Hathaway and Walmart. The Motley Fool has a disclosure policy.
