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Why Gannett Is Worth a Gamble

It's the best of a dying breed, but its hiked dividend is the real draw

   

Gannett’s (NYSE:GCI) earnings report on Monday was god-awful. Its dividend, however, is awesome, and that makes the stock worth considering for adventurous investors.

Earlier this year, the nation’s largest newspaper publisher and parent of USA Today, hiked its quarterly payout to shareholders to 20 cents per share, a 400% increase over a year ago and a 150% jump from the previous two payments. Seven months earlier, McLean, Va.-based Gannett more than doubled its dividend, which it cut in 2009 to pay down debt.

The dividend yield now stands at 5.32%, which is one of the highest in the S&P 500 and in line with well-known companies such as Altria Group (NYSE:MO), Verizon (NYSE:VZ) and utility company PPL (NYSE:PPL). Gannett’s yield is now more than double the 2.14% yield of the S&P 500.

Net income fell 24.6% in the most recent quarter to $62.8 million, or 28 cents per share, from $90.5 million, or 37 cents, a year earlier. Revenue slumped 2.6% to $1.22 billion, pulled down by declines in Gannett’s print business. Excluding one-time items, profits were 34 cents, beating the 31-cent average forecast of analysts surveyed by Bloomberg News. Revenue missed the $1.24 billion consensus forecast.

It might sound like I’m damning Gannett with faint praise, but it’s been considered on Wall Street to be the best run of any newspaper publisher. Unlike its rivals, such as the New York Times Co. (NYSE:NYT), which remains under the tight control of the Sulzberger family, Gannett seems to care about creating shareholder value. Gannett’s many critics have argued for years that the company is so focused on the bottom line that the quality of its journalism suffers. I will leave that question for another day. The affection, though, that Wall Street has for Gannett continues.

Shares of Gannett have dropped 5.2% over the past 52 weeks, beating the New York Times, which is down more than 34%; McClatchy (NYSE:MNI), whose papers include the Miami Herald, is down nearly 19%; while Lee Enterprises (NYSE:LEE), parent of the St. Louis Post-Dispatch, has plunged more than 52%. The average 52-week price target on Gannett is $17.19, which closed on Monday at $13.89.

One reason why Gannett has outperformed its peers is that it has played the bad hand it was dealt very well. It ended the first quarter with $1.67 billion in debt, down $95 million during the quarter. Its debt-to-EBITDA ratio is 1.7, which isn’t bad. Net cash flow from operating activities was $162.1 million in the quarter, which may tempt some private equity players.

Gannett will have little choice but to continue raising its dividend or else risk having shareholders flee in droves. The stock also is dirt cheap, with a multiple of 7.43, which means more share buybacks remain a possibility. Gannett could raise cash if it wanted to by selling its 23 TV stations or even a paper or two.

If Gannett were to sell some of its newspapers, it might actually be able to find a buyer. The hedge fund owners of the Philadelphia Inquirer, Philadelphia Daily News and Philly.com, a related website, recently sold their operation to a group of local businesspeople for about $65 million, well under the $139 million they paid for it in 2010. This proves newspapers are so cheap that some investors are willing to gamble on them.

Note: I’m not arguing that the newspaper industry is about to undergo a renaissance. In fact, the opposite is true. A recent study by the Pew Research Center’s Project for Excellence in Journalism found that for every $1 newspapers in digital revenue, they lose $7 in print advertising revenue. Still, the “death of newspapers,” which has been endlessly discussed, will take years if it happens at all.

Meantime, business at Gannett is improving, albeit very slightly.

“I think January was a slow month,” said CEO Gracia Martore during the earnings conference call. “But clearly, we accelerated through February and March. And as I said earlier, our average for February and March was better than what we did in the fourth quarter. . . . we currently anticipate that the second quarter will be much more like the way we ended the first quarter rather than the sluggishness that we obviously saw in January.”

For investors looking for a contrarian play, it’s hard to beat Gannett. The fact that it’s relatively healthy and pays a huge dividend makes it even more tempting.

Jonathan Berr does not own shares of any companies mentioned here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/why-gannett-is-worth-a-gamble/.

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