Alibaba Now Has An Impressive Shareholder Yield

Summary:

• Alibaba recently showed in a filing that it had bought back $275 million worth of stock in one week.
• The data shown in the filing allows us to estimate BABA’s forward shareholder yield.
• The historical dividends and buybacks provide a 6.87% shareholder yield. The forward yield using last week’s filings as a guideline is higher.
• BABA’s dividends are modest, but its buybacks appear to be driving significant capital appreciation.
• In this article, I explore why I’m as enthusiastic about Alibaba as I’ve ever been, in light of its high shareholder yield.

Alibaba Group Holding (NYSE:BABA) (OTCPK:BABAF) made the rounds on social media again Friday, as filings revealed that the company had repurchased $275 million worth of stock that week. The filings revealed that BABA’s buybacks continued apace in mid-September, and their wide circulation on X showed that BABA’s Stock Connect inclusion provided investors with valuable insights (these disclosures weren’t required before BABA joined Stock Connect).

The fact that Alibaba is now making daily buyback disclosures is an enormous help in calculating one of the stock’s most important metrics:

Shareholder yield.

Thanks to ongoing buybacks and a recently announced dividend, Alibaba now has an impressive 6.87% shareholder yield. By shareholder yield, I do not mean “dividend yield,” a simple measure of dividend over share price. Instead, I mean the total of buybacks, dividends, and net debt reduction, as a percentage of market cap. This form of yield measures all of the wealth being returned to shareholders, the reasoning behind it being:

1. Dividends are cash paid to shareholders.

2. Buybacks increase ownership and sometimes increase the stock price.

3. Debt reduction increases long-term equity value and reduces what bondholders would be paid in the event of liquidation.

Basically, dividends, buybacks and debt reduction all increase what the shareholder owns. For a going concern–a company not at risk of bankruptcy–dividends and buybacks are the more significant part of shareholder yield, as debt is not a major problem for a thriving company. As I will show in a later section, you could make the case that the more meaningful shareholder yield in BABA’s case is 9.23%, as the company is robust enough and its debt cheap enough for the existing debt to not be an issue. Nevertheless, I chose to use the technically correct 6.87% in the article title, as that’s the number going by the industry-standard way of calculating shareholder yield.

When I last wrote about Alibaba, I rated the stock a buy on the grounds of its cheap valuation and then-newly increased buybacks. The situation today is similar to what it was then. In fact, the stock has even gotten a bit more expensive, and outperformed the S&P 500 since the date on which I last covered it. However, thanks to Alibaba’s recent Stock Connect inclusion, the company is now obligated to report its buybacks on a daily basis. This makes it much easier to gauge the impact on a forward-looking basis. For that reason, I am upgrading my rating to strong buy.

How I Calculated Alibaba’s Shareholder Yield

Since the shareholder yield is a big part of my Alibaba thesis, I should include some notes on how I calculated it. Basically, I used cash flow statement information from Seeking Alpha Quant, checked it against the company’s own financial statements to make sure it was correct, then ran the numbers.

The results were as follows:

• $18.086 billion in buybacks.

• $2.55 billion in stock-based compensation (SBC).

• $15.54 billion in net buybacks.

• $2.47 billion in dividends.

• $-7.105 billion in debt issued (I use a negative sign here because re-payment is the ‘desired’ thing here).

• $2.491 billion in debt paid down.

• $-4.61 billion in net debt paydown.

So we have $13.4 billion in total wealth paid to shareholders. At Alibaba’s current market cap ($195 billion), that’s a 6.87% shareholder yield. Additionally, despite BABA having issued debt to finance its buyback, the company’s free cash flows were enough to pay for said buyback. As you can see below, the company’s TTM FCF was well in excess of the $18 billion spent on buybacks.

	June quarter	March quarter	December quarter	September quarter	TTM total	Cash spent on buybacks	FCF remaining after buybacks
FCF	$2.39 billion	$2.1 billion	$7.9 billion	$6.1 billion	$18.49 billion	$18.086 billion	$404 million

Click to enlarge

So, Alibaba’s buyback expenditure was well covered by free cash flow. The total, including dividends, was not, which may explain why BABA issued the debt: cash flows did not quite support the entire shareholder yield observed in the trailing 12-month period. On the other hand, the bonds came with just a 0.5% coupon and were oversubscribed, meaning the actual yield was likely even lower than the coupon. Therefore, Alibaba probably did not pay too high a price for that extra buyback cash.

Why the $275 Million Buyback News Changes the Game

The reason why the recent news about Alibaba’s $275 million in weekly buybacks changes the game on the stock, is because it gives us numbers we can use to estimate a forward shareholder yield. Before BABA’s Hong Kong primary listing, this wouldn’t have been possible.

What is Alibaba’s forward shareholder yield likely to be?

Here’s what we know:

• BABA bought back $275 million worth of stock last week.

• That’s $55 million a day on average.

• The amounts were fairly consistent across the week.

• There are 252 trading days in a year.

• BABA pays $1 per share in dividends.

• There has been no recent news about continued borrowing to fund more buybacks.

• BABA has $61 million in cash and equivalents on its balance sheet.

Based on these facts I’ll make the following assumptions:

• Buybacks continue at about $55 million per day in the year ahead.

• $2.5 billion is paid out in dividends.

• SBC remains steady at $2.5 billion.

• No new debt is issued.

With these assumptions, Alibaba’s forward shareholder yield basically reduces to buybacks over market cap, as dividends and SBC cancel out. $55 million in daily buybacks over 252 days works out to $13.86 billion. BABA’s current market cap is $195 billion. So, our forward shareholder yield estimate is 7.1% – slightly higher than the trailing yield calculated above.

Alibaba: Valuation

Armed with information about Alibaba’s past and present buybacks, we can now think about how these factors impact the valuation of BABA stock. I’ve covered Alibaba’s multiples and even done basic cash flow models on it in the past. This time around I’ll focus specifically on how these multiples could be affected by the ongoing buybacks and dividends.

According to Seeking Alpha Quant, BABA has the following EPS, book value per share and FCF per share metrics at today’s prices:

• $4.62 in normalized EPS.

• $6.97 in FCF per share (FCFPS).

• $54.28 in book value per share (BVPS).

At Friday’s closing price of $88.29, these figures produce the following multiples:

• P/E: 19.

• Price/FCF: 12.66.

• Price/book: 1.62.

These multiples on their own indicate that BABA is cheaper than the tech sector, but not outrageously cheap. It trades at multiples where investors would probably want to see some growth. However, the buyback continuing would serve much the same purpose as growth, even if whole-firm growth were not to materialize. Buybacks increase all the per-share metrics shown above, even if they don’t grow on aggregate. If BABA were to buy back shares at the $13.86 billion per year pace I forecasted above, it would retire 156.98 million shares, giving it a new share count of $2.33 billion. As a result, its EPS, FCFPS and BVPS would grow to:

• $4.93 in normalized EPS.

• $7.43 in FCF per share.

• $61.57 in BVPS.

The above estimates provide the following forward multiples, again using Friday’s closing price:

• P/E: 17.9.

• P/FCF: 11.88.

• Price/book: 1.43.

As you can see, if BABA’s stock price doesn’t change because of the buyback, then its multiples will come down. Therefore, if the stock is correctly valued now, then its stock price should rise in a scenario where my forecasted buybacks come to pass.

Risks

Alibaba is a modestly valued stock with a very high shareholder yield. It has a lot going for it. However, there are still several risks that investors need to keep in mind:

• Competition. Competition in Chinese e-commerce is fiercer than it was in the days when Alibaba was the only game in town. Today, Alibaba has JD.com (JD) and PDD Holdings (PDD) to contend with. The rise of these competitors may have something to do with the recent slowdown in BABA’s growth rates.

• Chinese Macro concerns. China’s most recent slate of economic releases missed estimates. The growth rates revealed were positive but slow. Also, mild deflation–usually a sign of growth problems–was observed in the most recent measurement period.

• A Taiwan invasion. China has not ruled out using force to achieve “re-unification” with Taiwan. Many experts think that China will invade the Island eventually. The risk here is not so much the invasion itself as the possibility of China introducing capital controls in response to the U.S. moving in to defend Taiwan. In that scenario investors could lose access to the Hong Kong markets, and not be able to trade their shares.

The above risks are serious ones; serious enough that an investor’s weighting in BABA stock should be kept within reason. My own weighting is about 10% – it’d be higher if not for the Taiwan tail risk. For the investing public as a whole, I’d say that holding BABA at higher than index weighting is justifiable, but I’d cap the position at 10%. The tail risk here is quite high.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of BABA, PDD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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