Smart Capital Allocation to Maximize Shareholder Value By TipRanks

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© Reuters. Ebay: Smart Capital Allocation to Maximize Shareholder Value

eBay (NASDAQ:) is one of the world’s largest online marketplace platforms, connecting millions of buyers and sellers globally.

The company goes back to the mid-1990s, and while most know it for its namesake marketplace website, eBay holds a diversified portfolio of investments, which has provided the company with great returns and potential synergies.

The $48-billion company holds investments in companies like Adevinta, Adyen, Kakao Bank, and other Korean businesses, valued at around $13 billion. eBay plans to sell most of its shares in these businesses, and only hold minority stakes to set up various synergies with them. (See EBAY stock charts on TipRanks)

Along with more than $7.6 billion in cash and equivalents in Ebay’s balance sheet, the company enjoys fantastic liquidity, which is likely to be utilized in what eBay has historically done best: return capital to shareholders. I’m bullish on the stock.

Financials & Capital Return Prospects

Despite shares of eBay appreciating significantly over the past decade, this has not been due to the financials of the company growing. Ebay’s revenues were $11.7 billion in 2011. Last year, and despite COVID-19 boosting the company’s performance due to people flipping various items during the pandemic, revenues came in at $10.3 billion.

Instead, eBay’s management has historically grown shareholder value through aggressive capital returns.

The company’s dividend yield is currently less than 1%. However, both annual increases over the past two years were by 14.3% and 12.5%, respectively. With that payout ratio just over 18.5% (assumes FY2021 EPS of $3.85 based on H12021’s performance and analyst estimates) and the so-far strong dividend hikes, we believe the company’s dividend growth prospects remain firm.

Nevertheless, the majority of Ebay’s shareholder value creation has been delivered through stock buybacks over the years. This has been the case since 2006, the year the company first started buying back stock, featuring a share count of around 1.42 billion shares. Today, the company only counts 650 million shares. In other words, eBay has repurchased 52.4% of its total shares during this period, which is utterly remarkable.

Therefore, while revenues remained stale for more than a decade, efficiencies achievements in what is already a high-margin business model, along with eBay’s massive stock buybacks, have resulted in great EPS growth over the years. Specifically, eBay features a five-year EPS CAGR (compound annual growth rate) of 14.6%.

Wall Street’s Take

Turning to Wall Street, eBay has a Moderate Buy consensus rating, based on six Buys, six Holds, and zero Sells assigned in the past three months. At $76.42,  the average EBAY price target implies 3.5% upside potential.

It’s worth noting that eBay’s forward P/E of 16.6 is in line with its historical average. It’s also a decent multiple for the company to keep buying back its stock without really overpaying.

Overall, eBay remains well-positioned to continue dominating the marketplace industry, especially now that collectibles culture has taken off.

With robust liquidity, and a proven capital return strategy, eBay should continue rewarding its shareholders finely moving forward.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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