Meredith Corporation (NYSE:MDP) has never exactly been a household name, but many of its brands are.
The company is an old school magazine business that has been a chameleon over the years, constantly evolving and growing into a $1.6 billion multimedia powerhouse with a lineup of television stations, magazines, websites, and online apps.
For income investors, Meredith has been a reliable dividend-paying stock since 1947 and increased its payout for 23 consecutive years.
Furthermore, the stock offers an above-average 3.9% dividend yield and has seen its dividend compound by 12.6% per year over the last decade.
alexwhite/Shutterstock.com
Higher-yielding dividend stocks usually do not record strong dividend growth, and MDP’s stock also trades at a modest 14x forward earnings.
Let’s take a closer look at the company to determine whether or not it offers safe, growing dividend income (1) or could be a value trap as the media landscape evolves.
Business Description
Meredith has come a long way from its early 20th century roots when it printed the first issue of Better Homes and Gardens.
Innovation has been the pattern all along. Back in 1948 during the early days of television, Meredith acquired its way into the business that now generates nearly half of its profits.
According to Chief Development Officer John Zieser, Meredith has used both acquisitions and strategic partnerships to transform itself into a “360 degree” media and marketing powerhouse that primarily makes money from advertising (55% of sales). Magazine circulation accounts for another 20% of revenue.
In the process, it has captured the biggest share of adult females of any American media company. This is the company’s target customer.
Through all the transformation, MDP still operates in just two segments: Local Media (33% of sales and 57% of EBITDA) and National Media (67% and 43%).
Local Media consists of 16 company-owned television networks that reach 11% of U.S. households: seven CBS affiliates, five FOX affiliates, two MyNetworkTV affiliates, one NBC, one ABC affiliate and one independent. Each station comes complete with mobile apps offering news, sports, and weather. The segment makes money from advertising and retransmission fees, which are paid by cable providers in order to carry MDP’s stations.
National Media provides a mixture of print and multi-media platforms. Anyone who has ever passed though a grocery store checkout isle will recognize MDP’s original Better Homes and Gardens magazine as well as brands started or acquired over time: Parents, Family Circle, Martha Stewart Living, EveryDay with Rachael Ray, Shape and FamilyFun.
The National Media segment’s digital media presence consists of 50 websites, 30 mobile-optimized websites, and nearly 20 apps that reach 100 million American women monthly.
Roughly 60% of this segment’s audience is reached via print, with the remaining 40% through online and mobile sources. Digital accounts for roughly 30% of total advertising and continues increasing its share as more readers go online.
In summary, Meredith is taking its old print publishing business model and transitioning into the 21st century digital world.
Follow Hawkeye Acquisition Inc. (NYSE:MDP)
Follow Hawkeye Acquisition Inc. (NYSE:MDP)
Business Analysis
Media and publishing is a ruff and tumble business. History is marked by many high profile successes and littered with just as many failures. At the end of the day, success is all about advertising.
The key is having the right media assets to enable advertisers to deliver their sales message to consumers.
The value of media assets can change just like stock prices. The internet has been disrupting traditional television and print markets for more than 15 years. Those who have succeeded have found ways of adapting their media platform to a far more mobile internet customer.
Meredith is unique in that it is one of the last remaining media companies to maintain publishing and TV businesses under one company. It wouldn’t surprise me if the company spun off its publishing business in the future, as its TV operations are seemingly more valuable.
The Federal Communications Commission and other agencies regulate TV station ownership, which makes this entry fairly difficult to enter for potential newcomers.
Rule changes over the years have considerably lessened previous restrictions on the concentration, opening the industry to a long-term series of asset swapping and consolidation among its participants.
The attraction to the business is simple. Meredith receives a fee from cable companies to carry its network stations (i.e. retransmission fees) and also keeps some ad space to sell to local merchants. The cash flow is very appealing both for funding operations and to finance expansion.
MDP’s television assets reach metropolitan areas containing 11% of the US population. None of its stations are in major top 10 media markets like New York, Los Angeles, or Chicago.
Rather than being just another fish in big markets, MDP has chosen to seek market leadership in smaller places like Portland, Oregon, that are attracting lots of newcomers to the area.
The majority of the company’s stations maintain #1 or #2 ratings in their markets, which helps Meredith negotiate favorable retransmission fees with cable companies and receive a healthy return for its advertising slots.
According to CSIMarket.com, Meredith ranks #3 overall in Local Broadcasting with a 0.61% share of market close behind E.W. Scripps at 0.74%. In terms of advertising sales, MDP does not rank in the top 10 as measured by market share.
In publishing, MDP comes in ranked #5 by CSIMarket.com with a 0.14% share of the national market. However, these rankings can be deceptive since they include giant newspaper publishers like market leader News Corp at 0.59% things like The Wall Street Journal or Gannett Co. at 0.31% with USA Today.
What this shows is just how extremely fragmented the publishing business has always been. What this data does not reveal is who has made the right moves in the modern world of digital communication.
As seen below, Meredith’s publishing business has been rapidly transitioning to a more online and mobile audience over the last five years.
The company is working hard to transition its 30 million monthly subscribers to digital subscriptions, which are more profitable and can benefit from higher renewal rates.
Source: Meredith Investor Presentation
When combined with higher retransmission fees from its TV stations in recent years, Meredith has been able to reliably generate operating margins in the double-digits.
The company achieved record revenue last fiscal year and continued to report growth in print advertising, indicating that Meredith has so far found its way under changing industry conditions.
Key Risks
Advertising revenue drives over half of Meredith’s total sales each year and is rather cyclical depending on political seasons and the overall health of the economy.
Spending will ebb and flow but shouldn’t impact Meredith’s long-term earnings power. However, the shift from traditional to digital advertising could.
Meredith’s Local Media publishing business generated about 75% of its advertising revenue from print sources last year.
While the company achieved 3% growth in print advertising spending last year, it could struggle to continue expanding. Growth in digital could more than offset any declines in print advertising, but it remains a risk for the publishing business (and Meredith’s overall growth).
Another risk factor to be aware of is retransmission fees, which I estimate to account for close to 10% of Meredith’s company-wide sales but a much higher percentage of profits.
Industry retransmission fees surged 20% last year and have skyrocketed over the last five years.
While growth is still projected in retransmission fees over the next five years, pay-TV subscriber losses are putting increased pressure on the price of cable.
As a result, there could be some pushback on retransmission fees (2) – no one knows.
Meredith is one of the smaller TV station operators. Since it lacks the scale enjoyed by many of its peers, its bargaining power with cable companies is presumably less when it comes to fee negotiations.
Meredith Corporation (NYSE:MDP) would almost certainly like to gain scale in this business, and it wouldn’t surprise me if management pursued a meaningful acquisition. This could create risk for the company but might also be necessary for its long-term future.
Dividend Safety Analysis: Meredith
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Meredith’s dividend and fundamental data charts can all be seen by clicking here.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here (3).
Meredith’s Dividend Safety Score is 84, which indicates that its current dividend payment is very safe.
The company’s strong score begins with its reasonable payout ratio. Meredith’s dividend has consumed just 43% of the company’s free cash flow generated over the last year. This is a healthy figure that provides a nice margin of safety and room for future dividend growth.
Meredith’s payout ratio has doubled over the last decade but has otherwise remained fairly steady most years. This is often the sign of a predictable business, which I like to see.
Source: Simply Safe Dividends
Another important factor impacting dividend safety is a company’s performance during recessions.
Meredith’s revenue fell by 10% in fiscal year 2009, but the business continued generating healthy free cash flow.
However, Meredith’s heavy debt burden made investors very nervous during the credit crunch and caused MDP’s stock to fall nearly 70% in 2008.
While Meredith was able to raise its dividend during the recession, income investors should be aware that the company’s high debt load could really whack its stock price.
Source: Simply Safe Dividends
Importantly, Meredith’s business model throws off excellent free cash flow, which is needed to pay dividends.
As seen below, Meredith has generated positive free cash flow for more than a decade. This consistency adds further support to the company’s dividend payment.
Source: Simply Safe Dividends
Return on invested capital is an important financial ratio to study because it often reveals clues about a company’s quality.
Many of the best businesses generate high returns on capital because they are very efficient and possess some sort of economic moat. This allows them to compound earnings (and dividends) faster if they have enough reinvestment opportunities.
Meredith’s return on invested capital has hovered near 10% most years, which is slightly above the corporate average. The dip in fiscal 2016 was driven by non-cash charges, which shouldn’t be repeated.
Source: Simply Safe Dividends
A final major factor to review for dividend safety is a company’s financial leverage. Debt payments will always be made before dividends are issued.
Meredith maintains $25 million in cash on hand compared to total debt of $695 million. Over $400 million in debt is due over the next three years as well.
While this could be cause for concern for some businesses, Meredith is still in a reasonably good place.
The company has over $100 million in free cash flow available after paying dividends each year, and we already saw how consistently Meredith’s operations generate cash.
Furthermore, Meredith has up to $160 million available under its revolving credit facility. Refinancing some of the debt shouldn’t be an issue in today’s low interest rate environment, and the company could reduce some of its debt burden as well if it wants to.
Source: Simply Safe Dividends
Overall, Meredith’s dividend payment looks very safe today. The company maintains a healthy payout ratio, generates reliable free cash flow in most economic environments, and has a proven commitment to paying dependable dividends.
Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Meredith Publishing’s Dividend Growth Score of 55 suggests that the company has about average dividend growth potential.
The company has increased its dividend for 23 consecutive years and paid uninterrupted dividends for 69 years.
As seen below, Meredith Publishing has delivered excellent income growth over the years. The company has raised its dividend by 12.6% per year over the last decade and 6.1% annually over the last three years.
Source: Simply Safe Dividends
With reasonably healthy payout ratios and solid free cash flow generation, Meredith Publishing is positioned to continue rewarding shareholders with moderate dividend growth.
Management last raised the dividend by 8% in February 2016, and low- to mid-single digit increases will likely continue.
Valuation
Shares of Meredith trade at a forward-looking price-to-earnings multiple of 13.8 and offer a dividend yield of 3.9%, which is somewhat higher than the stock’s five-year average dividend yield of 3.6%.
As seen below, MDP’s management team believes the company can record 3-4% sales growth while expanding margins.
Under these assumptions, the stock has potential to deliver double-digit annual returns.
Source: Meredith Investor Presentation
I’m not as confident in the company’s long-term growth rate because of its exposure to print publishing.
Expectations for double-digit annual returns seem a little aggressive to me, and I would be more comfortable expecting GDP-like growth at best, which results in annual total return potential closer to 6-10%.
Conclusion
For investors seeking safe current income with moderate growth, Meredith Corporation (NYSE:MDP) seems like a reasonable bet so long as its publishing assets do not begin to rapidly deteriorate and its retransmission fees continue rising.
There is some risk with how management decides to allocate capital (4) (e.g. a large acquisition to improve scale and negotiating power with cable companies), but the team has been disciplined and conservative historically. That will likely continue.
The company’s days of double-digit dividend growth are likely over given the rise in its payout ratios and slow-growth print publishing operations, but dividend raises have plenty of ability to continue at a pace in excess of the rate of inflation.
Overall, Meredith is a time-tested company that is navigating the challenges of an evolving media landscape while straddling two different lines of business (TV stations and publishing) that could realistically use more scale to better compete.
I personally prefer to invest in companies (5) with a clearer long-term outlook and more concrete opportunities for sustainable growth.
However, yield-hungry investors (6) could still give the business a look for its safe payout and modest valuation. There are worse ways to achieve a near 4% yield with decent income growth prospects.
Additional Links:
(1) http://www.simplysafedividends.com/blue-chip-dividend-stocks/
(2) http://www.ibtimes.com/how-high-can-cable-bills-go-tv-broadcasters-blasted-over-soaring-retransmission-fees-1988662
