Viacom, CBS, Time Warner and Walt Disney are on track to spend more on returning value to shareholders amid strong cash generation and a lack of major acquisitions.
NEW YORK - Rupert Murdoch's News Corp. recently unveiled a $5 billion stock buyback authorization - a move that was widely seen as a nod to investors and support for the company's sagging stock price amid the entertainment conglomerate's phone hacking scandal.
Expect more talk about shareholder rewards via stock buybacks, but also dividends during the latest quarterly earnings season for entertainment conglomerates!
After all, a range of Hollywood conglomerates have focused more time and money on keeping shareholders friendly in recent years. And after the financial crisis and recession, solid results, an improved advertising market and new revenue from digital media players paying for content have given conglomerates more confidence and financial flexibility to share bigger portions of their wealth with investors.
Management teams have also looked to use such measures to reassure investors that past instances of badly received or executed acquisitions are behind them. It is "typically a negative" for a company's stock when investors expect a big acquisition play, said Miller Tabak analyst David Joyce. Wall Street observers, for example, say News Corp. shares have over the years often traded at a discount due to the risk of a deal driven more by Murdoch's interests than shareholders'.
This year, many entertainment giants are on track to return more money to shareholders than in several years ¬ and in many cases more than ever before under their current leadership.
Sumner Redstone-controlled CBS Corp. and Viacom Inc. both announced increases in their quarterly dividends in recent months, and Time Warner boosted its dividend earlier this year. Many on Wall Street expect the second-quarter earnings season to bring a latest round of executive promises that media biggies will continue their focus on shareholder rewards. "Certainly, this will get attention, with companies at varying points in the capital return path," predicted Matthew Harrigan, analyst at Wunderlich Securities.
It is a stark contrast to years ago when most investors in media and entertainment stocks didn't even dare to wish for dividends, which used to be seen as a mainstay for more mature businesses with little growth upside. Wall Street observers say though they can just as well attract new investors who are looking to reap regular payouts.
Stock buybacks, meanwhile, show a management team's confidence that a company's stock is undervalued and reduce the number of outstanding shares and therefore boost earnings per share - a key metric that investors look at in earnings reports. While some investors prefer dividends and argue that timing buybacks correctly is difficult, they are also seen as a potential way to boost a stock.
Either way, putting cash into dividends and buybacks also reduces available cash for possible big acquisitions, which have been rare for entertainment giants in recent years, giving investors confidence that companies won't try to pull off ill-conceived mega-deals.
Viacom is on track to spend more money on shareholder rewards this year than in any year since it separated from CBS in early 2006.
Cowen analyst Doug Creutz recently estimated that the company could spend $2.25 billion on buybacks and $470 million on dividends during the current fiscal year, which after a recent change ends in September. For the calendar year 2011, total spending could go even higher.
Over the past few years, the $1.27 billion spent on buybacks in 2008 marked a high point for the company in spending on shareholder rewards, a figure that Viacom will handily exceed in the current year. Viacom had stopped its stock buyback program amid the recession to conserve cash as many companies did following the financial crisis. But in October, it started repurchasing shares again. And in mid-2010, it launched its first dividend since the CBS split.
At Nomura's U.S. Media Summit investor conference in June, Viacom president and CEO Philippe Dauman said "we are buying back $700 million of stock this quarter" and added that in the current quarter, which started in July, "we expect to buy at least that much of our stock."
Adding to those projected $1.4 billion the $473 million in stock repurchases made during the first calendar quarter of 2011 and around $90 million in dividends paid on April 1, the company has already exceeded $1.95 billion in shareholder rewards. And this month, Viacom paid out an additional $145 million for its latest quarterly dividend after a 67 percent increase to 25 cents per share.
"This substantial increase in our dividend, as well as our ongoing stock buyback program, reflects the confidence we have in our ability to generate ample free cash flow to support returning greater value to our stockholders while continuing to maintain a strong balance sheet and invest in the long-term growth of our operations," Dauman said in announcing the recent dividend increase, from which Redstone and all other shareholders benefit.
Free cash flow is cash flow from operations minus capital expenditures and therefore represents the cash that a company can spend on possible shareholder rewards.
At Viacom's corporate sibling, CBS Corp., share buybacks and dividend payments have also been on a major upswing after a more cautious approach during the recession.
"Returning value to shareholders is a commitment we take very seriously," said president and CEO Leslie Moonves during the company's May earnings conference call.
CFO Joe Ianniello previously said that CBS bought $250 million worth of stock in the first quarter and was on track to repurchase another $250 million in the second quarter. Plus, the company paid a $37 million dividend and in July doubled its dividend to 10 cents per share, or $74 million. That brings estimated total year-to-date shareholder returns to around $610 million.
That is already a multiple of the company's 2010 dividend payments of $141.7 million. The year 2008 marked the high point of dividend payments by the company over the past three full years with $705.4 million, but they came before the recession.
CBS had a stock repurchase authorization in place from 2008 to 2010, but did not buy shares during that time. Spending on buybacks is helping to boost shareholder returns this year.
Time Warner is also on track for a banner year ¬ the year with the highest spending on dividends and buybacks at least since chairman and CEO Jeff Bewkes took over as CEO in early 2008.
In 2010, TW had returned a recent record of around $3 billion to its shareholders in the form of dividends and stock buybacks, which it noted was more than 100 percent of the company¹s free cash flow, up from close to $2.1 billion in 2009 and $1.2 billion in 2008.
The company said in its first-quarter earnings report that it repurchased about $1 billion of its shares, and paid $260 million in dividends in the opening period of the year. "That marks a significant acceleration from our previous pace of direct returns and underscores our confidence in the fundamentals of our businesses and their cash generation capabilities," said CFO John Martin.
Earlier this year, the company raised its quarterly dividend 11 percent to $23.50 and increased its stock buyback authorization to $5 billion.
Cowen's Creutz recently estimated that the company could in 2011 end up spending about $4.6 billion on shareholder returns - nearly $3.6 billion in buybacks and around $1 billion in dividends.
For Walt Disney, Creutz has also projected higher spending on dividends and stock buybacks this year than last.
Overall, analysts say that entertainment conglomerate's focus on dividends and stock buybacks has made them more accessible to shareholders and popular with certain investors. Harrigan said he believes Viacom's to be the biggest beneficiary of increased returns among shareholders right now "given the momentum of underlying businesses, good cash generation and a chronic valuation discount on the stock."
While entertainment biggies have been sharing their wealth, some tech powerhouses have faced investor questions about how they will use their expanding cash war chest. According to Moody's Investors Service, U.S. companies outside the financial sector held $1.24 trillion in cash at the end of 2010, up 11 percent from $1.11 trillion at the end of 2009. The top 20 holders of cash account for $488 billion, including top-ranked Apple with $59.7 billion as of late December, and $76.2 billion as of late June, second-ranked Microsoft and number five Google.
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