A Newspaper Publisher With A 4.5% Dividend Yield to Consider
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Gannett (NYSE: GCI) recently reported an impressive third quarter earnings result. The company experienced good growth in both the topline and bottom line numbers. Its revenue growth was 3% and its net income grew as high as 33%. GCI’s revenue was $1.3 billion for the quarter, and the operating income came in at $217.2 million, 9.6% higher than last year’s $198 million. The third quarter EPS was $0.56, much higher than $0.44 EPS for the same period last year.
It is interesting to see that GCI’s higher margin segments are growing, such as Broadcasting. For the third quarter this year, the Publishing segment had $890 million in sales but contributed only $73.7 million to operating income; whereas the Broadcasting segment had $118 million operating income on only $237 million revenue. And it is the good thing that in Q3 2012, Broadcasting increased 36% in revenue and 73% in operating income compared to last year. The growth was from political ads and advertisement for Olympics at its TV stations. Furthermore, the Broadcasting segment generated the highest operating cash flow among the three segments, about $125.5 million, whereas it was $107 million in Publishing and $48.3 million in Digital segment.
Gracia Martore, the President and CEO commented: “We are extremely pleased to report strong results and a return to revenue growth. We achieved record third quarter results in our Broadcasting segment. Our TV stations leveraged top 10 ratings positions and a more locally focused sales effort to generate substantially higher Olympic spending. Through strong ratings and a great footprint, they also maximized the opportunity to attract political spending. The early success of our new, all access content subscription model resulted in significant growth in company-wide circulation revenue, the first increase since early 2007.”
As many investors might know, the newspaper industry is facing major headwinds today. Circulation volumes have been falling and advertisers don’t place all of their business in the newspapers’ hands anymore. Indeed, GCI has experienced a gradual decreasing trend in its free cash flow over time. In 2004, it had $1.3 billion free cash flow, and at the end of 2011, the free cash flow was only $742 million.
It was not very exciting when investors look at the company’s balance sheet. As of June 2012, it had nearly $2.37 billion stockholders’ equity. But it was much less than $2.88 billion goodwill that the company was carrying. In addition, the long-term debt was $1.67 billion. If the all the goodwill was impaired, total stockholders’ equity would be washed away, but the huge amount of debt would still be there. It was definitely not a good situation to be in.
Since the beginning of this year, GCI’s stock has experienced a good rise. It climbed from $9.82 to nearly $20 in September, and then stayed $17.85 at the time of writing. Currently, it is trading at 9.7x P/E and 1.6x P/B. Compared to its peers, including The New York Times (NYSE: NYT) and The McClatchy (NYSE: MNI), it was still the least leveraged companies among the three. Its D/E is only 70%, whereas D/E of NYT and MNI are 137% and 900% respectively. Because of high level of goodwill, GCI’s tangible book value is a negative number, of $-3.4 per share. NYT is the only company with positive tangible book value, of $1.1 per share, and MNI’s tangible book is $-15.4. GCI is the biggest company with $4.13 billion market capitalization, NYT’s market cap is $1.61 billion and MNI’s is only $228.9 million. In addition, GCI is the only one that is paying dividends. NYT and MNI haven’t paid any dividend since 2009, while GCI is paying around 33% of its earning out. The current dividend yield is 4.5%.
My Foolish take
Compared to MNI and NYT, GCI seems to be a best stock right now because of lowest leverage and consistent, good-yield dividend. However, even with the strong earning result in Q3 2012 with positive free cash flow and single digit P/E ratio, I would not consider initiating any position in GCI yet. The reasons are declining publishing industry, negative tangible book value and high level of goodwill.
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