United We're Stuck – Divided We're Worth More
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some companies are a combination of businesses that in theory work together and gain synergy. On the other hand, some companies have multiple businesses that really have nothing to do with each other. One such company is United Online (NASDAQ: UNTD), this company runs three different businesses that have next to nothing to do with each other. As a whole, the company is worth about $431 million. I believe broken into pieces this company is worth more.
Fellow fool Brian Pacampara recently wrote an article saying that United Online is a 4-star stock poised to pop. In fact, 92% of CAPS members have the stock rated to outperform going forward. One of the main reasons that members rate the company so highly is the dividend yield. At current prices the current yield is 8.37%. That is an impressive yield, but is it sustainable? Additionally, is there a reason this company gains by running three unrelated businesses?
United Online runs the FTD business which is an iconic brand name in the floral and related products business. The FTD business competes with companies like 1-800-Flowers.com and many smaller flower and gift businesses. Truth be told, FTD should be what United Online is all about. This is the largest part of the company's earnings and revenue, and is the only one showing positive growth. Revenues at FTD have grown from 66% of the total to 73% of the total in just the last year. FTD generated 11% revenue growth and 31% income growth. Customer trends are very positive also with orders up 15%, and average order size down just 1%. Long story short, this is the reason to own United Online, if the company can find something to do with the other two divisions.
Content and Media:
The company also runs a Content and Media segment that owns the brands: Memory Lane, Classmates, StayFriends, and Trombi brands. United Online also runs the loyalty program WorldPoints. To be blunt, these are brands that belong in someone else's stable. I would envision AOL (NYSE: AOL) as a potential buyer. AOL is looking for ways to expand its online properties, and the Classmates and WorldPoints brands in particular would be a good fit. These are brands that would cross-sell easily with other AOL properties. With over $210 million in free cash flow last year, and over $350 million net cash, AOL has the balance sheet to do this deal. While revenues and income were down from this division, it still is profitable, and only represents 16% of United Online's total revenues. Size and content matters in the online space, United Online just doesn't have the size to serve up these limited brands and have them compete against the likes of Google and Yahoo. If AOL wants to move up the ladder of prominence, adding online brands is one way to do it.
United Online has the nearly forgotten brands NetZero and Juno. While AOL still has about 3 million paid subscribers, NetZero and Juno have just 747,000 accounts. With this division making up just 11% of total revenues, I could see a local telecom player like CenturyLink (NYSE: CTL) being a better fit. CenturyLink already has the infrastructure in place to service these 747,000 subscribers. In addition, CenturyLink would be in a better position to try to up-sell these subscribers from dial-up to a low cost DSL service. The fact that NetZero is rolling out a 4G mobile broadband service would also fit well with CenturyLink's push to diversify its revenue stream. With over $2 billion in free cash flow last year, it seems that CenturyLink could come up with the funds to pay for this division. The fact that the division only generated about $27 million in revenue last year, but still created a profit of about $11 million makes it a small deal, but something that could benefit CenturyLink and United Online.
The most important part of why investors own United Online is their dividend. In the last quarter, the company generated about $12.663 million in free cash flow and paid out about $9.25 million in dividends. This gives the company a free cash flow payout ratio of about 73.05%. At this point, the dividend appears safe, as the company's capital expenditures are expected to stay relatively flat to declining.
The challenge presented if United Online were to sell off the Content and Communications brands is, the dividend would likely have to be cut. If the company cuts two of their three divisions they lose about 27% of revenue. By doing this, if we assume that cash flow drops the same amount we get about $9.24 million in cash flow left over in the most recent quarter. This would be a problem with $9.25 million in dividends. Assuming the same payout ratio of 73%, at that point United Online could afford a dividend of about $6.75 million. With about 90 million shares outstanding, this would work out to about $0.075 per quarter or an annualized rate of $0.30 per share. At current prices this would work out to a yield of 7.30%. This would still be a very good yield, and investors would benefit from a more consistent growth rate. The FTD segment is what drives this company, their web properties and dial-up Internet divisions are holding them back. United Online needs to start shopping these losing divisions today. Any funds from the sale of these divisions could be used to either improve the balance sheet, or returned to shareholders. Sometimes the parts are worth more than the whole. United Online needs to get less united, and less online to really benefit investors.
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