After AOL’s Special Dividend: Stay or Go?

tim armstrong aol ceoFirst and foremost I would like to thank AOL (NYSE:AOL) CEO Tim Armstrong for the special dividend I’ll be getting next week. I think I’ll use it to buy a nice dinner. For me it’s found money, coming from Microsoft’s (NASDAQ:MSFT) $1.1 billion purchase of some AOL patents back in June. But hey, you could’ve kept it and either put it into research or the company savings account.

So, now what do I do? I suspect that’s the question a lot of investors are asking themselves now, too. Now that the ex-dividend date has passed, it has taken the stock down from a closing price of $37.44 on Nov. 30 to $32.29 on Dec. 3, and while the week is young, the price has dropped another 4%, hovering just a shade under $31 per share as of Tuesday’s close.

C’mon Tim: I need you to convince me to not only stay in, but maybe up my tiny stake, which I’ve held since back before the $111 billion 2001 Time Warner merger debacle. The only good news that came from that little faux pas (not your fault, by the way) was that the 2009 breakup gave me some shares in Time Warner (NYSE:TWX), which have recovered somewhat from the pasting they took when you were one company.

So help me out — should I stay, or should I go?

I’m a bad-news-first kind of guy, so let’s start there.

Growth is anemic, as revenue per share has flat-lined around $5 since 2009.

Gross margins have dipped since hitting 36.5% in December 2010 and now hover in the 27% to 29% range. By the way, Yahoo‘s (NASDAQ:YHOO) gross margin is in the mid-60% range, and while it’s also trying to mount a comeback, YHOO is all lollipops and gumdrops on the Street right now.

Net income got a nice one-time pop in June from the patent sales, but it seems stuck in the $20 million-per-quarter range. That’s a gaping $200 million behind Yahoo.

Free cash flow and cash and equivalents similarly got a nice one-time pop in June, but haven’t reached $1 billion total in quite some time. Not quite operating on a shoestring, but not a lot of room for mistakes, either.

There must be good news, right? Maybe …

You just reported higher-than-expected revenue and profit on strong advertising growth and dial-up subscription revenue at its lowest rate of decline since 2006. Of course, dial-up revenues still fell 10%, so a slowdown is nice but not a sign of growth.

Global advertising is growing, and as an avid reader of Huffington Post, I can honestly say I see the ads every day. Of course, I never look at your Patch local news service, so maybe that’s a wash and might explain why display advertising in this group fell 3%. Hmm, maybe not a positive, either.

The stock is up by 116% over the past year, including over 107% year-to-date, far outpacing any of the major indexes. Wow.

But that’s it for the list of the good.

I have to say, Tim, I’m not persuaded to buy more shares anytime soon. Unless, of course, you’re going to sell more patents to the highest bidder — and pay me out again.

Let me know, and I’ll book us both a dinner reservation.

Marc Bastow is an Assistant Editor at As of this writing he is long AOL, TWX and MSFT.

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