When Yahoo! Unleashes Those Buybacks

 | Oct 23, 2012 | 9:44 AM EDT  | Comments
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Yahoo! (YHOO) investors were hoping to hear more details about how the company might buy back shares with the recent Alibaba stake sale.

Yahoo only bought back a little under $200 million in stock last quarter. That's not a lot when you consider that the company has earmarked $3 billion from the Alibaba sale for return to shareholders. Yet even that modest third-quarter buyback contributed $0.02 to earnings per share during a quarter that saw the company beat by $0.09 overall.

Just imagine what will happen once Yahoo actually gets its buybacks in gear and how that will dramatically increase EPS.

In the past few days, there seem to have been signals that the company might have already begun those buybacks. The stock's trading volume has been up significantly in the last few sessions, and it appears to be much stronger than that of the overall market.

On the call, new Chief Financial Officer Ken Goldman -- on his first day on the job -- didn't state specifically when buybacks would begin, but he did give some strong hints. Specifically, he said, "With regards [sic] to the form and timing of churn of the proceeds from the Alibaba transaction, as [CEO] Marissa [Mayer] discussed in her remarks, we think it's both in our best economic interest as well as shareholder interest to repurchase Yahoo! stock at these levels."

This suggests Yahoo will return $3 billion to shareholders through open-market stock purchases, rather than through a tender offer.

So we are unlikely to hear Yahoo ever come out and say, "OK, guys, we just started buying our stock big-time." Instead, what's more probable is that we'll hear a "reveal" on the next earnings call, such as, "We repurchased $1.5 billion in stock in the past quarter."

Could the company implement the full $3 billion in purchases on the open market during the fourth quarter? It's certainly possible. Yahoo trades about 15 million to 20 million shares a day. Let's say the company buys 10% to 20% of the total shares traded daily. We're talking about 68 trading days, or about one full quarter, to utilize the full $3 billion that's earmarked.

Let's say Yahoo does buy back $1.5 billion in stock this quarter. That will increase its EPS by about $0.155 this coming quarter. The consensus estimate for the fourth quarter is currently at $0.28 a share, so the stock repurchases could be a huge boon to forward EPS estimates.

There was also an announcement Monday that Yahoo had opened a $750 million credit line, with a chance to increase that by another $250 million. This credit line was said to be for "general corporate purposes" -- but this certainly could be used for more stock buybacks.

Why should you care about this? It means there will always be a buyer in the market for Yahoo shares. This should mean that the stock will have a floor, and the buybacks should remain an upward driver of the stock -- just as it was for AOL (AOL) when that company started its stock repurchases in August 2011.

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