I’ve more than quintupled my stake in this historically cheap legal monopoly that just did a reverse stock split

While nothing has been more popular among the investing community than artificial intelligence (AI) in 2024, the euphoria surrounding stock splits can undoubtedly give AI a run for its money.

A stock split is a tool that publicly traded companies have at their disposal that gives them the option to adjust their stock price and number of shares outstanding by the same factor. Keep in mind that stock splits are merely scratching the surface and have no impact on a company’s market capitalization or operating performance.

Most investors tend to gravitate towards companies that announce stock splits in the future. A forward split is designed to lower a company’s stock price to make it more nominally affordable for retail investors and/or employees who don’t have access to buying fractional shares from their broker. This type of split is almost always heralded by companies that are outperforming their competition and out-innovating.

Image source: Getty Images.

On the other hand, investors typically avoid companies completing reverse stock splits. A reverse split is intended to increase the share price of a publicly traded company, often with the goal of ensuring continued listing on a major stock exchange. Most companies that do reverse splits do so from a position of operational weakness.

In 2024, just over a dozen industry-leading companies announced or completed a stock split. Only one of these top businesses has completed a reverse split — and it’s the stock in which I’ve quintupled my holdings since mid-April.

Meet the most anticipated reverse stock split on Wall Street in 2024

While reverse stock splits happen all the time, none was more anticipated on Wall Street in 2024 than the recent split by the satellite radio operator. Sirius XM Holdings (SIR 0.08%).

In mid-December, Sirius XM announced that it would merge with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group, to eliminate confusion and stock price variation caused by having multiple classes of common stock. Prior to their combination, which took effect after the close of trading on Sept. 9, shares of Liberty Sirius XM Group had far outperformed Sirius XM over the past year.

But in addition to that merger, Sirius XM announced and completed a 1-for-10 reverse stock split (also after the close of trading on September 9) that reduced the number of shares outstanding from nearly 3.4 billion to just north of of 339 million.

Unlike countless companies that do reverse splits every year to maintain minimum stock price listing standards and avoid delisting, Sirius XM was a roughly $10 billion company at the time of its split and was not in danger to be eliminated.

Rather, the company’s board wanted to raise its stock price to make it more attractive to institutional investors. Stocks trading below $5 per share are considered prohibited or too risky by some fund managers. Splitting the company’s stock and cosmetically lifting the stock price into the mid-$20s should make it more palatable for big-money investors.

However, it wasn’t just institutional investors who were attracted to Sirius XM.

Image source: Getty Images.

I have increased my position in this legal monopoly by 463% since mid-April

Long before Sirius XM’s board announced plans to do a reverse split, I was busy adding to what started the year as a token stake in Sirius XM. Since mid-April, I have increased the number of shares I own by 463%.

Let me preface this discussion by stating clearly that Sirius XM is far from perfect. Its total number of subscribers has fallen in each of the past two quarters as concerns grow about the health of the US economy and the auto market.

Regarding the latter, promotional subscriptions to Sirius XM services are sometimes offered to new vehicle buyers for a period of three months. The company is banking on these promotional listeners to become self-paying subscribers. If fewer cars are sold, it means fewer opportunities for Sirius to convert promotional users into paying subscribers.

There are also some predictive indicators, such as the first notable drop in US M2 money supply since the Great Depression, as well as the longest yield curve inversion in history, that suggest economic weakness is in the US economy not too distant future Most radio operators depend heavily on advertising revenue to keep the lights on, and advertising spend tends to be very cyclic.

Despite these headwinds, I consider Sirius XM to be historically cheap and worth entering.

A phenomenal aspect of its operating model is that it is a veritable legal monopoly. Although it still faces competition for listeners from terrestrial and online radio providers, Sirius XM is the only legally licensed satellite radio operator. This gives the company some degree of pricing power with its subscriptions and should help it stay ahead of the inflation curve.

Another reason I’m attracted to the most anticipated 2024 Wall Street reverse stock split is because How generate income. While traditional radio companies rely almost exclusively on advertising to keep the lights on, Sirius XM has a closer to 80/20 split of subscription and advertising revenue (via Pandora Media, which it acquired in 2019) .

The conclusion of the radio industry as a whole is that the US economy is enjoying long periods of expansion. But when the inevitable downturns occur, it’s perfectly normal for ad revenue to drop significantly. Because Sirius XM generates the majority of its sales from subscriptions, and subscribers are less likely to cancel their service than companies are to cut advertising spending, it puts Sirius XM on a firmer footing than the competition.

I’ve also come to appreciate Sirius XM’s somewhat predictable cost structure over the years. Line items like equipment costs and broadcast expenses won’t change much, if at all, regardless of how many Sirius XM subscribers sign up.

But the main sticking point, at least right now, has to be Sirius XM’s historically cheap valuation. Even with stagnant sales growth right now, the stock is valued at a forward earnings multiple of less than 8, which is near an all-time low since the company went public in September 1994.

SIRI dividend yield data by YCharts.

In addition, the recent weakness in its shares lifted the company’s annual yield to 4.2%. Sirius XM’s board of directors is committed to supporting the company’s annual payout of more than $1 per share.

Sirius XM may not be a sexy stock pick compared to high-growth/high-flying AI stocks, but it is a historically cheap legal monopoly that should, over time, provide solid returns for patient investors .