DirecTV’s Buyback Plan Pleases Investors as Growth Slows

DirecTV Installation
DirecTV performs a satellite installation at a customer's home in Oklahoma. DirecTV, the El Segundo, California-based company, is the largest U.S. satellite-television company. Photographer: Paul Taggart/Bloomberg

DirecTV Chief Executive Officer Mike White calls himself a strategy guy, a trait earned from years working for future Republican presidential candidate Mitt Romney at Bain & Co. in the early 1980s.

“The first thing I did when I got to DirecTV was say, ‘Let’s take a fresh look at strategy,’” White said in an interview. White is entering his third year at DirecTV, the largest U.S. satellite provider, after a six-year stint as the CEO of PepsiCo International. “I’m constantly evaluating all of our options,” he said. “We look at everything.”

Still, White has a dilemma. DirecTV had $27.2 billion in sales last year, and the business has grown steadily since its introduction almost two decades ago. Then, it was a hot new technology marketed as an appealing alternative to monolithic cable providers. Now, the satellite market has matured to just another means of providing content. Finding new pockets of growth is increasingly hard to do.

With its $5.2 billion in annual operational cash flow, DirecTV has the muscle to acquire a content aggregator like Netflix Inc. or Hulu LLC, two companies he says he’s considered, or make a bid for another satellite company or wireless provider. Yet White is reluctant to invest billions in a deal or gamble with a Department of Justice that has been unfriendly to telecom deals. That’s led him to his current strategy of choice: buying back DirecTV shares with a vengeance.

‘Too Cheap’

Investors aren’t complaining.

“At the rate at which DirecTV is buying back stock, even with our relatively bearish forecasts, DirecTV simply looks too cheap,” Craig Moffett, an analyst at Sanford C. Bernstein in New York, said in a note to clients.

The shares have gained 13 percent this year, outperforming the Standard & Poor’s 500 Index, which is up 8 percent. DirecTV fell 1.5 percent to $48.41 at the close in New York.

Moffett boosted his recommendation on the stock from “market perform” to “outperform” earlier this year, even though he’s bearish on the U.S. satellite-TV industry.

Buying back stock will get DirecTV only so far, though. White will need to come up with a new strategy to keep profits rising. With programming costs escalating and margins shrinking, that’s going to be tough. DirecTV’s 2012 programming costs --the amount of money the company will pay to content providers such as CBS Corp., Time Warner Inc. and Walt Disney Co. -- will rise in the high single digits, Chief Financial Officer Pat Doyle said in the company’s fourth-quarter conference call.

Bundled Offerings

That’s about twice as fast as DirecTV can pass on those costs to customers on an annual basis, said Doyle in a March interview. While those rising costs are also hitting cable and phone companies, DirecTV’s biggest content delivery competitors, they all have one distinct advantage over El Segundo, California-based DirecTV: They can bundle in broadband Internet service with their television signal.

Cable operators, AT&T Inc.’s U-verse and Verizon Communications Inc.’s FiOS services offer video and broadband service, which can be bundled in with land-line voice for a so-called triple-play offering. DirecTV’s inability to compete with that has made some investors skittish about the stock.

“We’re fully aware of the bear case,” Moffett said. “Flagging subscriber growth. Shrinking margins. Creeping obsolescence.”

White says his “dream acquisition” would be to acquire a large cable company that would enable DirecTV to offer both TV and broadband service, but that such a combo “would never be approved.” Instead, he may seek to combine with the second-largest satellite provider, Dish Network Corp.

Still a Possibility?

White acknowledges Dish has strategic value and says an acquisition would make sense in a different regulatory environment. The government’s rejection of AT&T’s deal for T-Mobile USA Inc. has made him reluctant to pursue a deal “under this administration,” he said.

Dish CEO Joseph Clayton said last year he wouldn’t discount the possibility of trying a merger with DirecTV if it would “help enhance shareholder value.” Dish is trying to transform itself into a wireless company and is waiting for regulators to allow it to use satellite spectrum acquired from DBSD North America Inc. and TerreStar Networks Inc. for voice and data transmission over land-based towers.

DirecTV’s best prospect for future growth is Latin America, where it has a flourishing business with 12 million customers. But there aren’t many acquisition options for DirecTV in the region because TV competition is limited there, White said.

Instead, DirecTV may look to acquire spectrum in Latin America to improve its broadband offering, he said. White doesn’t expect to spin off or sell the Latin American business, which made up about 18 percent of the company’s fourth-quarter revenue.

“It’s a gem of a business opportunity,” White said. Latin American revenue has more than doubled since 2008.

Shifting South

Latin America revenue grew 42 percent in 2011 from a year earlier. U.S. revenue increased 7.9 percent in the same period.

“As cautious as we are on the U.S., we’re bullish on Latin America,” said Moffett, the Bernstein analyst. “It’s not hard to envision a day when Latin America is perceived to be the core of DirecTV, and where the U.S. is an afterthought.”

For now, White’s attention is on the stock buyback strategy. DirecTV bought back $5.5 billion in stock in 2011 and authorized a new $6 billion repurchase program in February. The company says it will continue to repurchase shares at a pace of about $100 million a week.

Investors clamor for share buybacks and White won’t make any enemies if he sticks with his plan, said Judah Rifkin, an analyst at ISI Group in New York.

“DirecTV is a business that’s returning cash to its rightful owners,” Rifkin said. “Management is making a conscious decision not to buy spectrum or do something out of their core competency in the U.S., and they’re using Latin America to grow. That’s a story investors like.”

The ultimate service to investors may yet come in the form of a sale of the company. White says the company isn’t on the block. Still, he cut his teeth at Bain, where finding value and selling at a profit was the name of the game. And White says he wouldn’t mind hearing from, say, Apple Inc. CEO Tim Cook.

“It would be a lot easier for Tim to call me up and offer me $80 a share to buy DirecTV,” White said with a chuckle. “And I’ll take that phone call, you can tell him I said that.”