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CBS Corporation (CBS): How Do You Improve on a 32% Return?

Published on June 6, 2013 at 9:00 am by The Motley Fool in News

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In addition, future dividend increases from CBS not only should be ongoing, but significant as well. The company leads its peer group with the lowest core free cash flow payout ratio. While none of these companies has a high payout ratio, The Walt Disney Company (NYSE:DIS)’s ratio is the highest at 44.06% of core free cash flow (net income + depreciation – capital expenditures). Time Warner comes in second at 32.04%, and Comcast Corporation (NASDAQ:CMCSA) pays just 19.06% of their free cash in dividends.Right now, CBS is paying out a measly 14.86% of its free cash flow. While it would be easy to chide management for not using more cash for dividends, remember that the company retired more shares than anyone else.

So What Can It Do Better?

There are two issues that investors should be aware of. One is simple to solve; the other is a longer-term concern. First, CBS Corporation (NYSE:CBS) needs to rid itself of its publishing business. While the Simon & Schuster business is cash flow-positive, its income represents less than 2% of the company’s total, its revenue is declining, and it carries terrible margins. This division needs to be spun off or sold.

Speaking of margins, CBS also needs to work on its operating margin in the core CBS business. Among its peers, the only company with worse margins in their network business was Comcast Corporation (NASDAQ:CMCSA), and that was due to the lack of the Super Bowl. Time Warner Inc (NYSE:TWX) and Disney reported operating margins of 34.86% and 37.56% respectively. By comparison, CBS’ operating margin was just 19.39%. Clearly, CBS can afford to trim some costs in order to get its margins closer to those of its peers.

CBS Corporation (NYSE:CBS) investors should be happy with their returns over the last six months. However, if the company doesn’t shed its publishing business, that division will continue to drag on results. And if it can’t improve on its margin in the network business, CBS will miss an opportunity to improve its cash flow even further. This company is doing great — but it can always do better.

The article How Do You Improve on a 32% Return? originally appeared on Fool.com and is written by Chad Henage.

Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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