Meredith Update: Dividend Paused

2020-04-21

Introduction

Meredith (MDP) surprised me with the recent announcement that they were going to “pause” their dividend – whatever that means.  Frankly, I was surprised because the company had been guiding for strong cash flow both operating and free cash flow and EBITDA growth over the intermediate term future.  So far, those consensus estimates have changed, but not enough to justify this dividend action.  Nevertheless, there is a lot of uncertainty especially regarding what future numbers might be.  With this said, the actual announcement was confusing, here are some excerpts:

“While our financial position is strong, given the impact on advertising – which represents approximately half of our revenue mix – we are proactively taking aggressive actions to strengthen our liquidity and enhance our financial flexibility in the near-term to effectively navigate the current environment,” says CEO Tom Harty.”

If their financial position is strong, and they are expecting growing cash flows, albeit at a slightly reduced rate, then I question why they are pausing the dividend and even questioning what that means.  This following excerpt illustrates my confusion:

“The board says it’s committed to paying a dividend over the longer term and wants to resume its dividend policy when ad market conditions improve.”

Since the company did not state that they are cutting their dividend, nor did they say they are stopping paying a dividend, and that the board is committed to paying a dividend, I’m not sure what their intentions are.  In other words, will they be reinstituting the dividend shortly like in the next couple of quarters, or will the dividend be paused for this entire year?  In other words, their message is confusing and vague.  To add to that confusion, these additional excerpts had me wondering:

“It’s also implementing operational cost controls, including cuts to board fees and salaries along with even tighter control over production costs and variable expenses. And it’s cutting capital expenditures.”

Even though they are stopping giving guidance, the company then stated that they were on track for the first 2 months of fiscal quarter 3, remember, this company has a June 30 fiscal year-end.

“The company was on track toward its Feb. 6 guidance for the first two months of fiscal Q3, it says.”

Now, if they were on track for two out of three months for the quarter, I was shocked to see them take such surprising action with their dividend.  This is in total contrast to how the company behaved during the recession of 2001 where they experienced two consecutive years of negative earnings growth (-9% in fiscal year 2001 followed by -28% in fiscal year 2002 both ending in June).

The same could be said about operating cash flow and free cash flow.  Both dropped during the 2001 recession and the 2008, 2009 recession.  At this point I might add, that although I see only a moderate change in cash flow estimates as of yet, earnings estimates have dropped precipitously as I will illustrate with a couple of FAST Graph screenshots later.  To add to my confusion even further, the company then boasted about their liquidity position as of March 31 as follows:

“As of March 31, it had about $100M in cash and equivalents, and $35M drawn on revolving credit; at Dec. 31 it had $21M in cash/equivalents and $55M drawn on the revolver. It also has access to additional liquidity through the $350M revolver.”

Here is a link to the full press release.

When you consider that their December 2019 dividend spend was about $41,600,000, it seemed like they would have ample liquidity based on what they stated above to at least maintain their dividend.  When you consider that the company is a Dividend Champion with a 27 consecutive year of increasing their dividend string, I felt this was an extreme action if their financial strength and liquidity is as good as they stated in the announcement.  Here are the current FAST Graph screenshots illustrating Meredith Corp.’s historical operating history and dividend performance:

Meredith Corp.: Historical Adjusted Operating Earnings Plus Forecast to 2022

Note that in the video I produced on March 27 the consensus estimate for fiscal year 2021 was $6.19, that has now been estimated to drop to $5.35.  Fiscal year 2021 earnings were estimated at $6.70 and they have now been cut to an estimate of $5.04. 

Meredith March 27 Video

Meredith Updated Estimates April 21, 2020

Meredith Corp. Operating Cash Flow Estimates are Forecast to Drop Moderately – At Least so Far

When I produced the first video, operating cash flow was forecast to be $6.52 for 2020.  That estimate has dropped to $5.93.  Operating cash flow for 2021 was forecast at $9.20, that estimate has dropped to $8.01.  These numbers are obviously lower, and the market doesn’t like that, but in my opinion they still support the dividend.  Obviously, management disagreed.  Therefore, perhaps there are things I still don’t know.

Meredith March 27 Video

Meredith updated April 21, 2020

Meredith Corp. Free Cash Flow Estimates Have Changed Slightly

When I produced the video, free cash flow estimates for fiscal year ending June 2020 were $4.82.  Currently, those estimates have dropped to $3.42.  However, that still seems like free cash flow would still be covering the dividend very well considering that the free cash flow payout ratio would have been approximately 51%.

Meredith March 27 Video

Meredith Updated

Meredith Corp. EBITDA Forecasts

Although I didn’t show it in the video when I produced the video, the EBITDA forecast for fiscal year 2020 was $14.45, it has been reduced to $13.27, which is still strong relative to historical norms.  Fiscal year 2021 was forecast at $15.75, that forecast has been reduced to $13.18, still indicating significant undervaluation.  When Meredith first made the Time acquisition, what attracted me was the forecast growth in EBITDA.  Although that has been reduced, EBITDA is still expected to be significantly higher than what was being produced from the legacy company.

Meredith Updated FAST Graphs Analyze Out Loud Video

Summary and Conclusions

From what I showed with this update, the fundamentals of Meredith are continuing to weaken.  However, I still believe they support a much higher stock price valuation than the market is currently awarding them with.  But most importantly, I don’t feel like what I have seen thus far justifies the “pause” in their dividend policy.  Of course, we may not know the whole story yet.  Therefore, since I own this stock, I believe it’s imperative to continuously monitor the situation.

Furthermore, as I disclosed in the previous article, I have a rather large position in Meredith Corp.  Due to these recent actions by management and the board, I am currently re-evaluating my own position.  At this point, my inclination is to sit things out until more clarity about the company’s future dividend policy is available.  On the other hand, there is a side of me that says take your lumps and move on.  That last action might not be that bad considering how much opportunity that the market is currently offering.  In other words, I do believe that finding a suitable replacement in today’s marketplace would not be that difficult.

The hat trick and the real challenge is to determine where there is opportunity and where there are major and permanent deteriorations.  This is unprecedented, but as I have stated often, it’s a time to be realistic but at the same time optimistic about the long-term.  Meredith has now become a greater challenge than I had originally expected.

Summary and Conclusions

What I see currently happening in the stock market is unprecedented in my long career.  Most of the time when there is deterioration in fundamentals, you can point to mistakes that management has made.  However, in this situation, most management teams are at the mercy of the coronavirus and the forced economic shutdown it has created.

However, as I have learned a long time ago and fiercely believe, in every adversity lies the seed of a greater or equivalent benefit.  As it relates to the stock market and investing in common stocks, I see the current crisis presenting a lot of short-term pain, but I do believe it will eventually lead to the possibility of exceptional long-term gain.

However, that is not suggesting that it’s going to be easy.  From one perhaps negative point of view, choosing successful stock investments for the future is certainly more challenging today than it’s ever been.  Nevertheless, from a more positive perspective, we haven’t seen opportunities like this since the great recession of 2008/2009.  With that said, there will also be failures and there will also be incredible opportunities.  All we can do is make the best decisions we can with the information that is available to us at the time. 

Consequently, I think the worst thing we can do is be afraid.  We should be prudent.  Perhaps even cautious, but not afraid.  We must remember that the market tends to be forward-looking.  Therefore, getting our money in front of the long-term opportunities presenting themselves is paramount.  Picking the exact bottom is not necessary.

As all this relates to Meredith Corp., I am personally in a wait-and-see attitude.  If I did come across a compelling opportunity that I couldn’t resist that would simultaneously allow me to maintain the dividend income I was receiving, I might act.  Until then, I’m inclined to see how things transpire over the coming quarters.  Most importantly, Meredith is expected to report earnings during the first week of May.  I will be looking forward to that with great anticipation, but not necessarily excitement.

Disclosure:  Long MDP.

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