Yahoo’s Mayer Urged to Repurchase Stock With Alibaba GainDouglas MacMillan
Yahoo! Inc. investors put off by a stock price that has barely budged this year are urging Chief Executive Officer Marissa Mayer to buy back shares rather than pay a dividend with the $3 billion raised from selling a stake in Alibaba Group Holding Ltd.
A buyback would give the signal that investors seek that Mayer has confidence in Yahoo’s growth prospects and in her ability to use innovative products to lure back users and advertisers who have defected to Google Inc. and Facebook Inc. A dividend, by contrast, may be seen as a tacit admission that management lacks fresh ideas to revive its business and must rely instead on regular cash outlays to hold on to investors.
With a buyback, Yahoo’s stock can double to $32 within a year, said Brett Harriss, an analyst at Gabelli & Co. Yahoo has said it will return proceeds from the Alibaba transaction to investors, without specifying when or how.
“They have historically bought back a lot of stock, and I think they’ll look at that as being the most efficient way to reduce the share count,” said Ryan Jacob, chief investment officer at Jacob Asset Management, who oversees a $120 million portfolio, including Yahoo shares. “It’s clearly trading at a valuation that’s below the sum of its parts.”
Mayer, 37, gave birth to a baby boy on Sept. 30, the first child for the executive and her husband, Zachary Bogue. At the time, Sunnyvale, California-based Yahoo said she continued to run the company and was working remotely, and planned to return to the office in one to two weeks.
Yahoo will report third-quarter earnings and hold a conference call on Oct. 22. The company’s shares fell 1.1 percent to $16.09 at the close in New York on Oct. 5, giving it a market value of $19.1 billion. That’s dwarfed by $251.8 billion for Google and Facebook’s $50.5 billion.
A buyback “gives a lot more confidence to shareholders if management is investing in the company at these levels,” Ron Josey, an analyst at ThinkEquity LLC, said in an interview. “They are suggesting that they believe the stock is undervalued relative to the opportunity out there.”
Yahoo announced its first share repurchase in 2001, for $500 million, and has since followed with three more, at $3 billion apiece, most recently in 2010. The last three programs boosted the stock by an average of 13 percent three months after they were announced and by 19 percent after six months.
A portion of Yahoo’s proceeds from the Alibaba transaction, $646 million, has already been used for stock buybacks in recent months, the company said in September. Mayer and the board of directors are currently deciding how to distribute the remaining $3 billion, Anne Espiritu, a spokeswoman at Yahoo, said in an e-mailed statement.
While Yahoo could opt for a one-time dividend or initiate a quarterly payout, long-term investors generally favor a repurchase because it adds value to shares without triggering a tax bill. Dividends tend to be preferred when a stock is overvalued.
“Investors are usually much more pro-buyback,” Brian Wieser, an analyst at Pivotal Research LLC, said in an interview. “It’s much cleaner. There’s a bias on Wall Street in general for buybacks versus dividends.”
Other analysts who anticipate a share repurchase include Youssef Squali at Cantor Fitzgerald LP and Brian Nowak at Nomura Securities International Inc.
Yahoo’s sales plunged 21 percent to $4.98 billion in 2011, the third straight year of declines. Revenue will decrease 7.8 percent this year, according to the average of analysts’ estimates compiled by Bloomberg.
AOL Inc., a provider of e-mail and Internet access, in August said it would distribute $1.1 billion in cash generated from a patent sale to Microsoft Corp. through a special $5.15-a-share dividend and a $600 million accelerated repurchase program.
Apple Inc., the world’s most valuable company, in March said it would pay its first dividend in 17 years, heeding investors who urged it to return part of its cash hoard. In addition to the $2.65-a-share quarterly payout, Apple announced a $10 billion stock buyback.
Though Yahoo remains one of the few large technology companies that don’t pay a dividend, Mayer, Yahoo’s fifth CEO in four years, is more likely to deploy a buyback, said Kevin Stadtler, president of Stadtler Capital Management in Ft. Worth, Texas, who manages $6.5 million in assets, including Yahoo.
“A lot of those shareholders, would they like to see a one-time dividend? Yeah, it would be kind of like a caffeine shot,” Stadtler said in an interview. Still, beyond appeasing investors, a repurchase would help Mayer to boost the equity value Yahoo uses to compensate employees and fund acquisitions, he said.
“It’s what’s best for the long-term strategic benefit of the company,” Stadtler said. “They need to give confidence to the largest mutual funds and the largest institutions that hold their stock.”
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