RIM chooses share buyback over an 8.5% dividend
RIM has some spare change.
Thanks to the fine work of Gary Will, I learned something very exciting today: Research In Motion (TSX:RIM) repurchased 12.3 million shares during the last quarter for the grand total of US$775 million. Cash from ops was US$1.07B, and including the money spent on capex and the acquisition of intangibles, cash out the door equaled US$1.114B. Despite being wildly profitable for Q3, RIM’s cash dropped by US$90 million primarily as a result of the buyback. The shares cancelled via the buyback represented 2% of RIM’s current market cap.
Why should this jump out at you?
Some market commentators will say that share buybacks represent a good way to return excess cash to shareholders. That by reducing the number of shares outstanding, everyone’s stake in a company’s earnings goes up and we all own more of the company as a result…without having to dip into our own pockets and buy more shares ourselves.
I’ve never bought into that theory.
One good reason to get excess cash off a balance sheet in this fashion is if you’re worried about a takeover bid, and don’t want the bidder to use your own cash to finance part of the bid. No strategic buyer ever really pays for the cash on hand when they bid for a company. But other than that one scenario, I’m just not a fan in most situations.
The trick with buybacks is that 1) on illiquid stocks the company can, at times, be the only buyer in the marketplace, 2) CEOs aren’t always best positioned to understand if their shares are “undervalued” – witness the US$1.6B share buyback by Lehman Brothers management in 2007 (see prior post “JP Morgan inks the deal of the year” Mar 16-08), 3) buying back shares may increase the share price, but stock option holders benefit disproportionally from the buyback action as compared to shareholders who actually paid for their shares with cash.
If RIM keeps up this pace, our favourite CEOs in the world (Jim and Mike) will use US$3.1 billion to cancel shares over a four quarter period. That works out to be more than US$5.50 per common share per annum. If that “excess money” was paid out to us as a dividend instead, RIM shares would be yielding a handle of 8.5% at yesterday’s closing share price.
With “just” US$2.41B of cash on hand (7% of market cap.) as compared to Apple’s US$23.5B (12% of market cap.), it is pretty clear that RIM’s not thinking about Apple’s balance sheet when it designed the share buyback program.
I know this isn’t the first time I’ve raised the point (see prior post “Time for a dividend policy at RIM” Mar 19-08), but has anyone in the ‘Loo considered the benefits of a divi? Or at least weighed the trade-offs against this massive buyback?
Some readers will point out that the idea of a growth company paying a dividend strikes many market purists as, well, quite nutty. But if the growth company doesn’t need this cash to foster the future, as RIM’s buyback implies, the question then becomes: what’s the best form to return excess capital to shareholders?
I don’t know what RIM’s current share price would be if they hadn’t cancelled 12.3 million shares during the third quarter. I do know earnings will be 3 cents/share higher this quarter due to the fewer shares that are now outstanding. But are institutional investors actually looking at RIM from a forward earnings standpoint these days?
Doubtful.
Seems like it trades off headlines and company quarterly guidance, just as it has done most days for the past decade. So, let the shares trade freely, without RIM corporate being the largest acquiror of its own shares in any given quarter.
I’ll take the risk that the shares will sink as a result of the absence of the buyback, and happily cash my quarterly 8.5% dividend cheques. If the share price slips further, the implied yield will just go up. And that’s a good thing. Dividend yields have a funny way of generating a natural floor to most share prices.
Come on, Jimmy. Show us the money! 😉
MRM
(disclosure – I own RIM, and my Dad has a blockbuster book coming out on RIM in March; being published/sold in several countries around the world, inc. USA, UK, China and India)
Dividends are taxed. Buybacks lower shares outstanding and thus boost EPS. I have a slightly different view, I do not think investors *generally* give enough credit for cash. But they do value EPS increases. And perhaps the EPS boost at a constant multiple will boost the share price. Thus, your net worth goes up and you will not have to pay taxes until you sell – and it will be a capital gain.
As for " No strategic buyer ever really pays for the cash on hand when they bid for a company." Open Text buying Vignette?
RIM needs to do better than buyback shares or declare a dividend. It needs to invest more capital both human and monetary into fending off the attack from Apple and Google. Push email was disruptive when it came out almost a decade ago, but everyone does it now. What will the next disruption be? And where will it come from?