an almost certain upgrade to their capital return program looming mid-year
Went through the 10-Q this morning trying to get a handle on where they can take this.
Some basic stats:
- They initiated a share repurchase program in 2009 of $200M and have added to it periodically, the most recent addition was $200M in Jan 2017. The total authorization since 2009 is $1.3B and they have $122M remaining as of the end of last quarter. They spent $30M in the last quarter to buy 500K.
- They are running at about $70M/q free cash flow, this last quarter was only $17M but A/R went up $50M so still right about at $70M. Current dividend is $16M/q. They also bring in cash from options exercise but I'll leave that out, an issue for another day.
- $1.15B in cash, equal to about a year's revenue. Licensing companies need to maintain solid balance sheets, both in terms of the ability to engage in legal fights and also to be able to forego certain amounts of revenue during such fights. How much is enough is a subjective question, but I would say a year's total revenue is way more than necessary.
Per their recent comments, in 3-6 months all of the cash will be unencumbered....available. Free cash flow is running about $70M/q and rising, dividends are $16M/q. At a bare minimum, they do not need to add to their cash balance, and I would suggest up to $600M of the cash balance can be made available immediately. As such, I believe they will be looking at a capital return program of $500-600M plus $300M annually.
If it were me, I would announce a $1B share repurchase program plus an immediate doubling of the dividend. That puts the dividend at $32M/q, $128M/yr. Payout still well below 50% free cash flow, and they can raise it at the rate of free cash flow growth in the future. They can be aggressive and target 2 years to complete the $1B repurchase, bringing the cash balance down in the $500M range. Or they can stretch it out and maintain a higher balance. For reference, over 4 years with double digit growth they would still be able to maintain a cash balance in the $800-900M range and that assumes they double the dividend immediately and grow it at the cash flow growth rate. |
