Sirius XM Holdings(NASDAQ: SIRI) increasing its quarterly distribution rate on Monday seems like a non-event, on the surface. A hike itself isn't a surprise. The satellite radio provider has always boosted its payout at this point of the year since initiating a dividend policy in late 2016.
It's also not much of a move. The new quarterly rate of $0.27 a share is just a 1.5% advance. It's certainly welcome to see a dividend move higher at a time when interest rates are falling, but this uptick barely moved the yield needle. However, there are some pretty good reasons to be excited by the small bump in disbursements. Let's crank up the dial.
The storm before the calm
The stock chart doesn't lie. The market's rolling, but Sirius XM is trading 50% lower in 2024. The satellite radio provider has struggled to grow its audience. After years of modest but positive growth, it has 806,000 fewer subscribers now than it did a year ago. Churn has held steady over the years. Sirius XM is losing 1.5% of its listeners every month. The problem is that the funnel of new subscribers is thinning.
The auto market isn't exactly booming. Younger drivers who grew up on streaming apps don't want to necessarily pay as much as $25 a month for coast-to-coast access to audio content, especially when they're already paying for cheaper premium streaming apps or fine with ad-supported options. However, even Sirius XM's own streaming options aren't aging well. Sirius XM's Pandora and other off-platform options have experienced a 5% decline in active users and subscribers over the past year. This is actually worse than the 2% slide for its flagship satellite radio service.
The longevity of satellite radio has always been a bear battlecry for more than a decade, but the realization of that trend isn't helping the bulls. Its audience may have finally peaked in early 2023.
Adding a new complication at the worst possible time, the conversion of Liberty Sirius XM Group tracking shares to the more widely traded common stock last month triggered more selling. An event that could've been a positive development -- eliminating tracking shares of John Malone's majority stake that historically traded at a discount -- backfired out of the gate. Many owners of the tracking shares likely cashed out following the conversion once the discount was eliminated. A 1-for-10 reverse stock split that accompanied the September transaction also would carry the negative stigma of companies that declare reverse splits.
Image source: Getty Images.
The calm after the storm
Sirius XM coming through with a dividend hike this week -- small as it may be -- restores stability after a tumultuous start to 2024. There's a long tail here. Sirius XM's trailing revenue has only declined 0.6% over the past year. Profitability is actually widening.
The stock may have hit a 12-year low last month, but the business is in better shape than one would expect for a potentially transitory media empire. Sirius XM still expects to generate $2.7 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year and $1.2 billion in free cash flow.
The shares are cheap in a market where many alternatives carry heavy valuations. Sirius XM is trading for just 8 times trailing earnings. The 4% yield is significant, and this week's hike only draws more income investors to the healthy payout that also is appealing to value investors. Even Warren Buffett seems to think so, increasing his stake earlier this month. Berkshire Hathaway now owns nearly a third of the shares of the out-of-favor media stock. If you think that Sirius XM is too cheap to ignore at current levels you're in good company.
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Rick Munarriz has positions in Sirius XM. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
