These Media Companies Have A Cash Problem

| About: Viacom Inc. (VIAB)

In taking a look at the top media companies, we found they all have a similar problem, a cash problem; too much cash that is. The industry is plateauing and infrastructure is already in place, making the need for capital expenditures limited. Here are some of the best companies in the industry that are poised to throw off cash to shareholders: Viacom (VIAB), Disney (DIS), News Corp. (NWSA), Time Warner (TWX) and CBS (CBS).

Check out the cash positions of these top media companies:

Company Current Ratio
Viacom 1.3
Disney 1.1
News Corp. 2.2
Time Warner 1.4
CBS 1.6
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Even with industry current ratios above 1.0, the industry dividend yields remain relatively low, when compared to other yields investors can find in the market.

Viacom Disney News Corp. Time Warner CBS
Dividend Yield 1.80% 1.40% 0.60% 2% 1.10%
Dividend Payout 23% 18% 15% 37% 17%
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Of the companies mentioned so far, my top pick would have to be Viacom, which pays a 1.8% dividend yield and has current ratio of 1.3. Although its dividend yield is top among its peers, that is not the sole reason to jump into the media giant. The investment thesis for this company is its valuation and ability to generate cash. Viacom trades the cheapest of the media stocks on both a price to earnings (next year earnings) and price to operating cash flow basis:

Viacom Disney News Corp. Time Warner CBS
Price to Earnings (next year earnings) 10.8 13.7 13.7 13.8 14.4
Price to Operating Cash Flow 12 12.5 17 13.7 13
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All the media companies have been reducing capital expenditures over the past few years as the industry presents fewer and fewer worthwhile investments.

Company 5-Year Capital Spending Growth
Viacom -6%
Disney 19%
News Corp. -6%
Time Warner -28%
CBS -8%
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Two of Viacom's main segments include media and entertainment. The media segment sales includes advertising time and affiliate fees from cable television operators. This makes up 68% of total revenue as of fiscal year 2012. The film entertainment segment makes up around 32% revenues. The lack of movie releases has not kept the stock down as it is up 22% over the last twelve months. Moreover, Viacom is generating strong free cash flow, which should help the company maximize shareholder wealth through dividend payments and share repurchases.

Viacom Disney News Corp. Time Warner CBS
5-Year Cash Flow Growth 5.60% 4.50% -11% -15% --
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The five-year operating cash flow growth has been the most robust for Viacom over the last five years, and this may well be the trend for the next five. Viacom recently re-signed its 7-year deal with DIRECTV (DTV), one that will allow the media company to generate a 20% rate hike. Other big agreements include those with Netflix and Hulu for distributing digital content. These businesses generate very high margins, around 75%, and should help boost profitability over the interim. Management plans on continuing to expand its digital content distribution deals, both in the U.S. and internationally in the near future. Worth noting is that Viacom is breaking into the online social gaming business.

Disney, the only company having grown capital spending over the last five years, had a record year for capital expenditures last year. Disney hopes to provide investors with a solid return on that invested capital by expanding into Asia and increasing traffic at theme parks.

News Corp is still planning to spin off its publishing business and is up 45% over the last twelve months on the news. This has put the company at a high-valuation and so investors might be best served holding out until the spin-off is complete. Time Warner posted non stellar numbers for the first nine months of 2012, but expects solid ad sales. CBS is making an initiative to get cash in shareholders hands by converting its outdoor advertising segment into a REIT and planning to divest its international outdoor unit.

Viacom also leads its peers with respect to return on equity and sustainable growth rate:

Viacom Disney News Corp. Time Warner CBS
Return on Equity 30% 14% 10% 8% 15%
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Viacom Disney News Corp. Time Warner CBS
Sustainable Growth Rate 23.1% 11.5% 8.5% 5.0% 12.5%
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With a 23% sustainable growth rate, opportunities are there for Viacom to outperform, which I think the company will take advantage of; seeing how Viacom has the best sustainable growth rate in the industry, it is hard to see why the media company should not trade closer to its peers. The EV/EBITDA industry average multiple is at 6.5, while Viacom trades at 5.4. Theoretically, if Viacom should trade at a 6.5 EV/EBITDA multiple, the stock would be undervalued at 16%. Don't forget, Viacom also pays a 1.8% dividend that is only a 23% payout of earnings. The cash flow growth and valuation make Viacom an intriguing pick in an industry that is ripe to return cash to shareholders. The media company returned some $3.4 billion to shareholders in 2012 via dividends and share repurchases.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.