Netflix Buying Back Shares With No Room For Error; Probably Better To Hoard Cash
A WSJ article regarding Netflix (
NFLX, $55.10), "Netflix's Stock Buybacks: Money to Burn" by Martin Peers, caught our attention. Mr. Peers opens with, "In the corporate world, there are savers and then there are spenders. Apple, for instance, has hoarded $34 billion in cash and investments with no dividends or stock buybacks. At the other extreme is Netflix." He then goes on to correctly summarize the following:
- Netflix is spending cash more than it generates to repurchase shares at a very high multiple.
- Management thinks buying even at current levels are a good "value" (*per CEO Reed Hastings on call).
- Forward free cash flow growth is not a certainty in a competitive marketplace.
- As excess cash is depleted, Netflix plans to borrow money to fund more share repurchases.
- And, many companies made ill-timed repurchases in recent years.
Let's dig a bit deeper and look at the details. Some commentary from the conference call transcript (sourced via Seeking Alpha here):
- Since inception of our first buyback program in Q2 of 2007, we repurchased a total of 17.8 million shares for a net reduction in total outstanding shares including stock option grants of 18%. In total, we have spent approximately $545 million, which is more than we have in total assets at the end of the third quarter [= average price per share of $30.62].
- In Q3, we repurchased 3 million Netflix shares at a cost of $130 million [= average price per share of $43.33]. In the process, we completed the buyback authorized in December of 2008 and began repurchasing shares under the $300 million buyback authorization we announced in August.
- Under the $300 million authorization, we have repurchased a total of 2.7 million shares at a cost of $122 million, including 1.2 million shares purchased Q4 to date [= average price per share of $45.19].
- Last quarter, we announced plans to modestly leverage our balance sheet to fund future share repurchases and that remains our objective.
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