CBS stock: An eye toward dividends
Investor Daily: Shares have taken a beating, but the media company's dividend keeps growing.
NEW YORK (Fortune) -- Media stocks are among the most beaten-down issues in today's market, but if you look past a battered share price to other fundamentals, some analysts say there are bargains to be had.
That's one strategy David Joyce, a media industry analyst at Miller Tabak, offers up for investing in the sector, which he views as very attractive right now.
One fit for Joyce's investing strategy is CBS, to which he's given a "buy" rating. The mass-media company's stock dropped about 67% in 2008, but it also has a dividend yield of around 12%. Joyce calls it a "unique kind of asset in the media world" because there are few other dividend payers to that degree.
Not only is CBS's dividend strong, says Joyce, it's also safe. Unlike companies in the financial sector, CBS doesn't have regulatory capital requirements that will force it to reduce its dividend, and mathematically there's no need to cut it.
"All of their revenue could fall by 20% in 2009 and they could still have enough free cash flow to satisfy the dividend where it currently is," he says. "There's still plenty of space there."
The history of CBS's dividend goes back to its 2005 split with Viacom. The move divided the slower-growth, higher cash flow, and therefore higher dividend paying assets (CBS (CBS, Fortune 500)) from the higher-growth, no dividend assets (Viacom (VIA)), says Joyce.
The company's management has shown continued commitment to the shareholder payout, growing the dividend every few quarters - without growing it too fast. The payout has steadily increased 35% over the past two years. Joyce says Chief Financial Officer Fred Reynolds has been very vocal about conservatively increasing the payout because CBS wants to maintain it over time.
At a financial conference on Jan. 6, CBS chief executive Leslie Moonves pointed out that the company just paid a dividend on Jan. 1. "We like paying dividends," he said, "and it remains to be seen what will happen."
CBS's diversification across a range of different asset types also plays in its favor, according to Joyce. Its outdoor assets, such as billboards, have held up well, he said, because their messages can't be avoided when walking down the street or driving.
CBS has radio stations, although it has been selling some of them off, and it also owns publisher Simon & Schuster. It furthered its Internet reach with last year's $1.8 billion CNET acquisition, a purchase that has taken some heat.
"The price they paid for CNET was definitely expensive and dilutive," Joyce says, "but that's the kind of price you have to pay to acquire growth and get into an area that has been taking market share away from them."
Not everyone views the stock so favorably. Anthony DiClemente, an analyst at Barclays Capital, rates the shares "underweight" and advises investors to remain cautious.
DiClemente says it would probably be imprudent for CBS to continue raising the dividend for the next year and a half, and there's even some chance it may have to trim it in 2009. The probability only increases if 2010 is a bad year. In a Jan. 5 report he noted that "long-dated options indicate a dividend cut is likely." But that might not be a bad thing for the stock.
"It's kind of a conservative move because you're conserving cash, you're conserving cash flow, and you're safeguarding liquidity problems that could arise from continuing to pay out a dividend in conjunction with declining free cash flow," he says.
Of greater concern to DiClemente is advertising, which generates about 70% of CBS's revenue. Barclays' 2009 U.S. advertising estimate is down 10% year over year, which would be the worst year for ad sales since the Depression.
CBS's earnings are more volatile because of their higher exposure to advertising, according to DiClemente. If investors anticipate a recovery in the ad market, its stock could outperform its peer group. But at this point, he doesn't see any evidence or signs that the recovery is coming soon.
Longer-term, DiClemente has concerns about viewers' shift to cable away from the big broadcast networks, whose market share has dropped by half over the last 25 years. The growth of online videos has also increased competition and makes it harder for CBS to make money off its shows online because ad buyers are not completely comfortable with the Web.
Despite those issues, Joyce believes these fears are built into where the stock is trading right now.
"Even if they do cut the dividend, it's north of a 12% dividend yield," he says. "You're getting paid to wait if you can just look past the recession and plan on holding this a year or two." 
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