Sustainable Dividends in Large Caps are a Myth?

Published Thu, 15 Oct 2015 15:45 CET by

Many investors believe that investing in large-caps can guarantee dividend sustainability, or that investing in small- or mid-caps may be a risky business. The bottom line of investing is to preserve capital in volatile markets, whether you consider a large-cap or not. In general, large-caps, doing business internationally, tend to have solid financial results and tend to generate large amounts of free cash flow. However, there is also a higher risk involved in the process, which slow-growing firms can leverage by taking advantage of small business opportunities.
This article performs a comparison between a small-, a mid- and a large-cap, all in the publishing industry. Their average D/E ratio is 0.82, their average dividend yield is above 3%, while their average payout ratio is above 200%. Based on the analysis, it takes more than a higher EPS and a payout ratio close to the industry average to sustain dividend investing. It actually requires companies to continue generating sufficient free cash flows to sustain the stability demonstrated in dividend payments.

New Media Investment, New York Times and Tegna YoY Stock Performance Graph
New Media Investment Group (NYSE: NEWM) is a fast growing company focused on operating and investing in diversified, high quality U.S. media assets, as well as on expanding its marketing and digital advertising business. Being one of the leading publishers and highly-acknowledged media brand names in the United States, New Media Investment operates in over 415 markets across 31 states and has been publishing nearly 85% of the daily newspapers for more than a century and 100% for more than 50 years. Strong Q2 Results: in Q2 2015, New Media Investment reported operating income $19.5 million, up by 164.4% YoY and a net income of $11.2 million, up by 239.4% compared to Q2 2014. Furthermore, New Media Investment’S free cash flow reached $33.2, up by 69.4% YoY, while free cash flow per share increased by $0.09 ($0.74 from $0.65) in spite of an additional 14.7 million shares in Q2. Shareholder equity was up by 59%, $612 million from $385 million in Q2 2014. The result of these strong financials was an annualized dividend of $1.32, 22% higher than Q2 2014. Effective Acquisition Strategy: New Media Investment’s business model focuses on acquisitions and print and digital initiatives that can drive long-term grown and deliver substantial value to its shareholders in the form of dividends. Since February 2014 when the company went public, New Media Investment has completed more than $585 million of projects, while it has a strong plan of future acquisitions. Consistency In Dividend Payments: New Media Investment remains committed in delivering strong dividends. Currently, the company’s dividend yield is 7.60%, well above the average dividend yield of its peers which is close to 4.7%. Furthermore, the New Media Investment’s dividend coverage ratio is 8.48, suggesting that the company generates sufficient earnings to deliver a dividend to its shareholders. The company’s payout ratio is well above the industry average of 70.75%, but this is due to its low EPS of $0.26. Analysts estimate an average EPS of $1.43 through 2017, up by 451.3% and an earnings growth of 58.7% in 2015, 45% in 2016 and 27.6% in 2017.

New York Times (NYSE: NYT) is a prominent media company providing news and information in print, online and through digital platforms to readers and viewers worldwide. In October, The New York Times passed one million digital-only subscribers. Strong Q2 Results: in Q2 2015, New York Times’s operating income reached $38.1 million, up by 130.6% from $16.5 in Q2 2105. This was due to a decrease in operating expenses by 7.4% - $372.2 from 344.8 YoY, which led to a net income of $16.4 million, up by 78.5% from $9.2 million in the same quarter last year. Furthermore, New York Times’s long-term debt was down by 1.7%, $428.8 million from $435.7 million YoY, which is reflected in the company’s low D/E ratio of 0.51. Proficient Business Relationships: New York Times has recently entered into three proficient relationships with Facebook, Apple and Starbucks. Facebook Instant Articles are soon to be launched, Apple News will be on later in 2015 and Starbucks will be launched in the first half of 2016. All three initiatives aim at expanding the current customer base by reaching new larger digital audiences and to improve the reader experience through advanced, high-tech apps. Dividend Policy: New Media Investment’s dividend yield is 1.28%, well below the magic 3% milestone and the average dividend yield 4.7% of its competitors. However, its dividend coverage ratio is 102.5, leaving no room to doubt that New York Times will be in a position to generate sufficient earnings to deliver a dividend to its shareholders. Analysts estimate an average EPS of $0.54 through 2017, up by 262.2% and an average earnings growth of 8.5% annually through 2017.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
New Media Investment 17.37 13.96 25.77 24.43% -32.60% 0.76 56.76 0.63 0.86 508%
New York Times 12.52 11.48 14.53 9.06% -13.83% 2.07 83.50 0.51 1.77 107%
Tegna 25.35 21.30 38.48 19.01% -34.12% 5.74 5.73 1.32 1.77 62%

Tegna (NYSE: TGNA) is a well-established media and digital company with a wide portfolio of businesses that deliver broadcast, digital, mobile and print products to more than 90 million Americans. Tegna was formed in June 2015, following the spinoff of Gannett Company that retained its name but passed its publishing assets to Tegna. Tegna currently owns and/or operates 46 TV stations and is the largest group owner of stations affiliated with NBC and CBS. Q2 Results subject to spin off and acquisitions: In Q2 2015, Tegna’s operating revenues were down by 8.7%, $727.1 million compared to $796.5 million in Q2 2014 as a result of approximately $12 million of revenues in 2014 related to accident businesses, and $10.6 million of unfavorable foreign currency exchange rate changes. Before the impact of accident businesses in foreign currency, revenues were down by 6%. In addition, Tegna’s earnings were down by 44.4%, $115.87 from $208.47 as a result of the spinoff with Gannett and the affiliation agreement with The company expects further decline in its operating income between $4 and $6 million in Q3 and Q4 2015 due to the contract with Career Builder that went into effect in August 2015. On the upside, the company reported net income $115.9 million, up by 2.6% from $112.9 in Q1 2015, whereas operating income was $268.4 million was up by 16.2% from compared to $230.9 of the first quarter in 2015. Dividend Payments: Tegna’s dividend yield is 2.21%, well below the average dividend yield 4.7% of its competitors. Yet, the company’s dividend coverage ratio of 206.91 guarantees a dividend sustainability. Analysts estimate an average EPS of $2.17 through 2017, up by 141.1% from current EPS of $0.90, while annual average earnings growth is estimated at 6% over the next 5 years. Looking Forward: Tegna’s management intends to reverse the declining results through new streams of revenue based on advanced technology. The company aims to capitalize on the growth of the digital segment to deliver value to its shareholders.