Those who want to become successful investors could do worse than following in the footsteps of the legendary Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett, perhaps one of the greatest investors of all time. Since taking the helm of the company in 1965, Buffett has had an unparalleled track record, as his stock picks have delivered compound annual returns of approximately 20% and are collectively up 4,384,748%.
Stock splits have seen a resurgence in recent years, and it’s easy to see why. This practice is generally reserved for companies with consistently strong sales and earnings growth, which fuels a rising stock price. In other cases they can be used to further a corporate action.
Investors might be surprised to learn that despite selling off large chunks of Berkshire’s stock portfolio in recent quarters, the so-called “Oracle of Omaha” has been buying up shares of one stock split that he apparently can’t get enough of – Sirius XM Holdings(NASDAQ: SIRI).
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In a filing with regulators that was withdrawn earlier this month, it was revealed that Berkshire Hathaway increased its stake in the satellite radio operator by more than 3.5 million shares, spending more than $86.7 million. That brings Buffett’s total holdings to 108.7 million shares, currently worth more than $2.9 billion (at the time of writing). With approximately 339 million shares outstanding, that amounts to approximately 32% of the company’s outstanding shares.
Sirius
First, there is the company’s dominance in the industry. When it comes to satellite radio, Sirius is second to none. It has 33 million paying subscribers, but its audience rises to 150 million listeners if you include Pandora, the company’s ad-supported streaming music service.
In the second quarter, revenue fell 3% year-over-year to $2.18 billion, while earnings per share (EPS) of $0.08 were flat. While that may not seem like much to write home about, a look at several other numbers provides insight into why Buffett finds this company so attractive.
During the quarter, Sirius XM generated free cash flow of $343 million. The company’s roughly 33 million subscribers generate a hefty amount of recurring revenue, as do its advertising on Pandora. The subsidiary reported 2.6 billion listening hours, ensuring robust advertising rates. Buffett is a big fan of recurring cash flow, and Sirius has that in abundance.
I would be remiss if I didn’t address the elephant in the room. Sirius XM has been shedding subscribers from its flagship service for several consecutive quarters. However, management explained that while the number of paid subscribers fell by almost 1.5%, this was largely due to unpaid trial subscriptions offered by a number of automakers. The company attracts many of its subscribers as a result of these free trials.
The macroeconomic headwinds of recent years resulted in fewer cars being sold and therefore fewer new memberships. In addition, as consumers made difficult choices at the gas pump and in the store aisle, some let their subscriptions lapse when they came up for renewal. However, history shows that an improving economy bodes well for consumer spending, including Sirius XM.
Then there’s Pandora’s advertising business. Many companies are cutting back on advertising spend to weather the economic downturn, but as inflation continues to decline, advertising is making a long-awaited recovery, which is evident in the company’s results. Although advertising revenues remained stable year over year, they increased 10% sequentially. As the economy continues to recover, so will Pandora’s advertising revenue.
Besides a degree of predictability and strong recurring cash flow, there’s another benefit that Buffett may find attractive. The company pays a healthy dividend that yields around 3.9% and has risen 166% over the past ten years. Plus, with a payout ratio of just 28%, there’s plenty of potential to grow that dividend in the years and decades to come.
There is also appreciation. The above-mentioned challenges have spooked investors, causing the stock price and valuation to fall. Sirius XM currently sells for just 8 times earnings and 1 times revenue – which is the definition of attractively priced. It’s no secret that Buffett loves a bargain, and Sirius certainly qualifies.
Buffett isn’t the only one who thinks Sirius XM stock is cheap. Benchmark analyst Matthew Harrigan belongs squarely to the Buffett camp. Last week, Harrigan reaffirmed his buy rating on Sirius XM with a $43 price target.
That represents a potential upside of 58% compared to Monday’s closing price. The analyst had previously cited market decoupling due to the recent merger with tracking stock Liberty Sirius XM. He also believes that management’s laundry list of “strategic initiatives” will ultimately be successful.
To summarize, Sirius XM generates strong, predictable free cash flow, has a generous and growing dividend, and is selling at a price. Given its improving macroeconomic outlook, potential upside, and Warren Buffett’s seal of approval, Sirius XM might be worth a look.
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Danny Vena has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Meet the stock split Warren Buffett can’t stop buying. And according to one Wall Street analyst, it still offers 58% upside potential. was originally published by The Motley Fool
