Are eBooks Saving Publishing Dividends?

Published Mon, 3 Sep 2012 11:00 CET by

Publishing is usually perceived as a mature industry characterized by a steady pace of growth, which excludes unsustainable highs and devastating lows. However, since the advent of the Internet and digital technologies that have revolutionized the industry, publishing has been changing its face. While the overall market is stagnating or growing at a low single-digit rate, e-publishing sales are reaching for the skies. Now, the introduction of tablet technologies and smartphones is buoying the record-smashing sales of eBooks. The explosive growth in electronic publishing is a sign of the publishing industry's transformation in line with new social trends and technologies.

Despite the publishers' need to invest in adaptations in order to survive (in some cases in order to thrive), several major industry players have been able to grow cash flows that enable them to pay attractive dividends. Among these publishers are the publically-traded companies that offer dividend yields well in excess of the average yields on the major equity benchmarks and government bonds.

Among the major publically-traded, global industry players, Wolters Kluwer (AEX: WKL)(OTCBB: WTKWY) pays the highest dividend yield. This $5.4-billion company provides legal and regulatory, tax and accounting, health, and financial/compliance services. It pays a dividend yield of 4.8% on a payout ratio of 76%. Its dividend grew at a rate of 3.2% per year over the past five years. The stock has a P/E of 16x, which is a discount to the industry average of 17.7x. It has a free cash flow yield of close to 7%; however, it bears a large debt burden relative to equity.

Another high-yielder is Thomson Reuters (TSX: TRI)(NYSE: TRI). This company is a $24-billion global integrated information solutions provider. Its dividend is currently yielding 4.4%, although the company is operating at a loss. As a share of last-year's free cash flow, the dividend payout ratio stands at 67%. The company boosted its dividend by nearly 6% per year over the past five years. It has experienced strong headwinds in its largest segment (Financial and Risk) and is yet to return to meaningful organic growth. Still, Thomson Reuters has high cash balances and discretionary cash flow generation, which assure the continued payment of its dividend. The stock is undervalued based on the price-to-book ratio.

Thomson Reuters Stock Price Chart
Reed Elsevier (AEX: REN)(LSE: REL)(NYSE: RUK), an $11-billion provider of professional information solutions, yields 3.7% on a payout ratio of 53%. Last week, investment bank JPMorgan upgraded the stock's rating from neutral to overweight, citing strong first-half results that are showing successful restructuring efforts and positive trends in all company's divisions. Moreover, analysts see improving organic growth (in Science, Risk, and Exhibition divisions) and better margins (in Reed Business Information and Legal divisions). The company's buyback program is also contributing to EPS growth. The stock is trading at a small discount to the publishing industry and its own five-year historical metrics.

Another player in the publishing world is Pearson (LSE: PSON)(NYSE: PSO). The company is a $15.3-billion education, business information, and consumer publishing business. Its dividend yields 3.6% on a low payout ratio of 37%. The company has seen EPS growth at close to 18% per year over the past five years. Over the same period, its dividends increased at about 3% per year. The company has a P/E below its five-year average ratio. The stock is also trading at a discount to the publishing industry in terms of the price-to-book ratio (1.7 for Pearson versus 2.9 for the industry).

McGraw-Hill (NYSE: MHP) is a $14-billion publisher and provider of financial information (and the owner of Standard and Poors). It pays a dividend yield of 2.0% on a low payout ratio of 32%. Over the past five years, the company bolstered its dividend by 5% per year. It is forecast to grow its EPS at an average rate of 11.4% per year for the next five years, which is four times faster than the average annual rate for the past five years. The acceleration of the company's EPS growth and a low dividend payout ratio suggest that future dividend hikes are likely. McGraw-Hill is in the process of splitting into two companies, namely McGraw-Hill Financial and McGraw-Hill Education. The company's shareholders will receive one share of the new education company for every three shares held. The company is pricier than other industry players based on the P/E. The stock boasts a high ROE of 43%.

Smaller publically-traded players in the industry that pay dividends include Scholastic (Nasdaq: SCHL), which focuses on children's book publishing. Its dividend yield is 1.6% on a low payout ratio of 16%. Courier (Nasdaq: CRRC) is a small-cap play with a high dividend yield. Its yield is high at 7.5% and its dividend payout ratio is slightly above 100%. John Wiley & Sons (NYSE: JW-A) pays a dividend yield of 1.8% on a low payout ratio of 23%.

It should be noted that there are attractive dividend plays among newspaper/magazine publishers. For example, Axel Springer (XET: SPR.DE)(OTCBB: AXELF), a $5.4-billion German publisher, pays a dividend yield of 4.7% on a payout ratio of 63%. Its dividend increased at an average rate of nearly 8% per year over the past five years. Gannett (NYSE: GCI) is a U.S.-based, $3.5-billion owner of newspapers, including USA Today. It pays a high dividend yield of 5.2% on a payout ratio of 47%. Its competitor Graham Holdings (NYSE: GHC) pays a dividend yielding 2.8% on a payout ratio of 54%. British Connect Group (LSE: CNCT) yields 7.1% on a payout ratio of 68%.