Friday, November 07, 2008

Is CBS Eyeing Dividend Cut?

Les Moonves, Chief Executive of CBS Corp. (CBS-$8.25), told analysts on the third-quarter 2008 earnings call that the company was committed to paying a healthy dividend to its shareholders. As global recessionary pressures mount, whether the broadcaster can continue to produce the free cash necessary to support the current 13 percent yield, or $1.08 per share, is questionable.

During the third-quarter ended September 30, free cash flow was a $38 million use of cash compared to the 2007 September-quarter when CBS threw off excess cash of $265 million. The drop in free cash flow of $304 million was due to $120 million lower adjusted operating income (before depreciation and amortization), resulting from a nearly seven percent year-on-year drop in advertising sales and higher capital spending (at TV stations and on a
London Underground advertising contract).

Ad buys are the engine driving growth at CBS, representing approximately 70 percent of total sales. In my opinion, uncertainties from current economic conditions will likely depress advertising sales in 2009, blurring earnings visibility at the "EYE" network. Although non-cash in nature, anticipated cash flows to be generated from certain properties in the future have been lowered, as evidenced by write-downs disclosed in the
third-quarter 2008 regulatory filing:

  • "During the third quarter of 2008, the Company performed an interim impairment test as a result of its assessment of factors such as the continuation of adverse market conditions, which affected the Company's market value and trading multiples for entities within the Company's industry, as well as the continued economic slowdown which has adversely affected the Company's advertising revenues, primarily at the Company's local businesses.
  • As a result of this impairment test, the Company recorded a non-cash impairment charge of $14.12 billion in the third quarter of 2008 to reduce the carrying value of goodwill by $10.99 billion and intangible assets by $3.13 billion. The charge was reflected as a reduction to goodwill at the Television segment of $5.81 billion, the Radio segment of $2.33 billion and the Outdoor segment of $2.85 billion as well as a reduction to the carrying value of intangible assets related to FCC licenses at the Television segment of $2.13 billion and the Radio segment of $984.6 million, and franchise agreements at the Outdoor segment of $8.2 million."

At first glance, the balance sheet appears healthy, with leverage of 2.3 times operating income (before depreciation and amortization) and a coverage ratio at 5.6 times interest costs. However, cash on-hand has fallen $1.75 billion in six-months to $550 million, due to stock buybacks, CNET acquisition, and lower operating income.

The company is comfortable with a
dividend payout ratio of approximately 50 percent, suggesting the company will need net profit of about $1.37 billion in 2009 to satisfy existing common stock dividend commitments. Whether earnings from higher-margin content businesses, such as syndication and online/interactive, will offset anticipated pullbacks in radio and TV spending by advertising customers remains the $64,000 Question.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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