the audit

The NYT’s new dividend is unwise

Keeping Wall Street—and Sulzberger trust funders—happy
September 20, 2013

Does The New York Times Company have $24 million a year to spare?

Apparently its executives—and more to the point, its Wall Street analysts and its Sulzberger trust fund kids—think it does. The company is reinstating its dividend, which it suspended for nearly five years while the company’s business cratered.

Now, there’s been no resurgence in NYT fortunes, though the bleeding has slowed significantly thanks to its hugely successful paywall strategy. And its balance sheet is in far better shape than it was back in 2009 when it had to take a usurious loan from Mexican super-billionaire Carlos Slim. The NYT has paid off a bunch of debt, sold all of its non-Times businesses, and now sits on some $750 million in cash and short-term investments.

But the Times is still fragile, and now, after selling, the Red Sox stake, and its regional papers—including The Boston Globe, the newspaper is The New York Times Company.

In some respects, that’s good because Times has performed far better than The Globe. But it also now has all its eggs in one basket. It doesn’t have’s cashflow anymore or the Red Sox’s investment income. It has a bundle of cash sitting there.

By declaring a dividend, the Times is attempting to say to investors that the worst is over; that it’s a stable company with a solid future now. And it’s appeasing Sulzberger family members who would really like some dividend checks.

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Now, the dividend is not huge. It comes to just under a 1 percent yield. The company has had averaged diluted earnings per share of about 12 cents in each of the last five quarters. The dividend will be 4 cents per share, which means the coverage ratio is 3—well in the comfort zone of affordability.

The problem is, every dollar shuffled off to shareholders is a dollar that can’t be reinvested or socked away to secure the Times‘s future. That’s a big reason why The Wall Street Journal fell into the hands of Rupert Murdoch, as Audit Fund Manager Dean Starkman demonstrated back in 2007.

If the Bancrofts had taken, say, half of the cash out of the company that they did, Dow Jones would have had a quarter-billion dollars to play with from 2000 to 2007. Would that have made the difference? With its management, probably not, but it couldn’t have hurt.

The same is true for the Washington Post Company. If it had invested in the Post with a fraction of the more than $1 billion it handed back to shareholders during the crisis, perhaps the Grahams could have kept the family jewels.

The Times‘s embattled CEO, Mark Thompson, explains the dividend decision to the paper:

“Given the expectation of continued volatility in advertising revenue and the fact that our growth strategy is at an early stage of development, we will maintain a prudent view of both the balance sheet and free cash flow,” he said.

“Volatile” is one way to put the Times‘s ad revenue. “Declining with no end in sight” is a better one.

The NYT’s advertising continues to disappear at an alarming rate. Last quarter, ads dropped another 5 percent, on top of a 7 percent decline a year earlier.

Perhaps worse: Digital advertising, which should be one of the paper’s few growth opportunities, declined in the second quarter for the second consecutive year, as well.

And the paper has already gotten most of the low-hanging fruit from the paywall. Increasing circulation revenue is going to be much harder over the next two years than it has been in the last two.

A 1 percent dividend isn’t going to sink the Times on its own. But it sure won’t help. As I wrote last month when the FT’s Lex column pitched an even worse NYT dividend idea:

Paying a dividend would be the absolute stupidest thing the Times could do right now–much less using all its free cash flow to fund one. The company needs to pay down debt and invest in growing its business. It is not out of the woods yet. Squandering its cash to prop up its short-term share price would threaten its existence should another downturn hit.

At least the company isn’t coming close to using all its free cashflow to fund the dividend. But get a couple of years of revenue growth before you go handing capital back to shareholders, would ya?

Further reading:

The New York Times Company in 2015. Trendlines–as of right now–don’t point to its demise.

The Washington Post Co.’s Self-Destructive Course. Dividends, share buybacks, and an anti-paywall stance help bleed the paper dry.

What’s Good For the Bancrofts Is Bad for the Journal. The WSJ’s parent paid outsized cash dividends, to the primary benefit of the Bancrofts, instead of reinvesting.

The Slack Wire: Disgorge the Cash! JW Mason on how shareholder capitalism feeds on itself.

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 Follow him on Twitter at @ryanchittum.