Gannett had one helluva bad quarter, losing a tenth of its revenues from a year ago and more than a third of its profits.
But something too often lost in all the gloom of the cataclysmic upheavals in the newspaper business is that they’re still profitable—highly profitable in most cases. And they’re throwing away big money every quarter in the form of rich dividends.
For all of Gannett’s misery from April to June, it still posted a 13.5 percent profit margin, far below those famous (or infamous) margins of a few years ago that were about double that, but still a level that Wal-Mart (with 3.1 percent margins last quarter) or Toyota (4.8 percent) would love to have.
But Gannett’s dividend ratio is sky high. As of yesterday, one share of Gannett cost $17.24 but returns $1.60 in cash dividends to its holder annually. That’s a 9.3 percent yield.
The chain is hardly alone. The New York Times Company, while not nearly as profitable as Gannett, has a dividend yield of 6.9 percent. Media General has a 7.4 percent rate. McClatchy yields 14.7 percent, as Dow Jones Newswires says here. Lee Enterprises? 21.2 percent.
It’s clear these companies won’t be able to keep up dividend payments at their current levels. No industry could when its sales are falling at or near a double-digit rate—and soaring dividend ratios are often a sign for investors that a cut is in the offing.
But, allow us to run something up the flagpole here, just to “blue-sky” it for a moment; think “outside the box,” as they say in the world of high finance: Why pay dividends at all? After all, newspapers are not and probably never will be again the monopolistic cash machines of yesteryear. They’re hardly in the “widows and orphans” stocks class anymore with predictable cash streams like utilities or, cough, banks.
The Dow Jones story makes the point here about the NYT and McClatchy, just as our Audit commander did more than a year ago about Dow Jones itself before it was absorbed into News Corporation.
Here’s what Rupert Murdoch—by far a craftier businessman than anyone leading these other companies—said to The New York Times about DJ—just before he took it over:
”A year ago, they made $81 million after tax and paid $80 million in dividends,” he said, “and you can’t grow a company that way.”
But the families that control the voting shares of the companies depend on the dividends to support their lifestyle, putting them in a Catch-22: Give up the private jet or milk their cash cows dry.
What could the newspaper business do with a spare $311 million? That’s how much Gannett paid out last year in dividends and about how much it will this year. The struggling New York Times Company, which like everyone else has taken the ax to its news staff, dropped $125 million in “excess” cash on its investors last year. That surely would have made a difference in its newsroom, which has a budget of some $200 million. Even McClatchy paid out $59 million last year.
That’s a lot of cash floating out of a business that’s hurting for a new business model. Surely, newspapers could find better uses for these hundreds of millions of dollars than giving it back to shareholders (and family members).
Of course, lots of people invest in companies for their dividend payments, and companies that cut their dividends typically see their share prices fall.
But it just might be taken as a sign from investors that newspapers believe they can make better returns investing the money in their business, one that they think isn’t actually on death’s door. Or that the companies are paying down debt or creating a rainy-day fund to make it to the other side of these awful bad times.
Whatever, newspapers ought to end or at the very least severely curtail their dividends—and put the cash to more creative use.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.