AT&T (NYSE:T) recently announced its intention to acquire DIRECTV (DTV) in a cash and stock deal that values DTV at $95 per share. The deal is expected to take a year to close assuming it passes regulatory scrutiny. Fortuitous for me, I happen to own shares in both, which leads to my current dilemma. In the article below, I will detail my thought process concerning continued ownership of these two fine companies.
I would like to begin with an examination of T. I own shares of T as a bond substitute in my portfolio due to its very generous dividend rate. Due to the predictable nature of its business, T generates a large amount of free cash that is returned to shareholders in the form of dividends. One of my favorite metrics is free cash flow yield, which in my view is a more reliable metric to use with companies that have large capex budgets such as T. T FCF yield was 10.2% for 2012 and 7.3% respectively for 2013. Notice the large drop off in 2013, this is reflective of T continuing heavy investment in capex which eats up a large amount of its free cash flow.
AT&T Inc. Historical Dividend Data
(formerly SBC Communications Inc./Southwestern Bell Corporation)
|Year||Payment Date||Record Date||Amount|
DTV is immediately helpful in the free cash flow department as it generates a healthy amount of cash flow. The FCF yield of DTV over the past two years has been 8%, which speaks very highly to its ability to generate bottom line profit. Many authors on this site have lambasted the deal as short sighted, as they believe satellite television is going the way of the dinosaur. My view is this is a bit of a ways off, in the interim the FCF generated by the satellite television division will allow T to continue to reward shareholders with annual dividend hikes and share repurchases (For a bullish take on a different satellite provider please click here). I expect the dividend that will be announced after the deal is consummated to be a larger percentage hike than we have received over the past couple of years. With a clear path to a higher dividend received over the next couple of years, combined with the absolutely pathetic bond rates offered elsewhere, the choice is abundantly clear. I will continue to hold my shares in T and reinvest the dividend received.
That brings me to my dilemma concerning my shares in DTV. When I originally purchased shares in DTV in January of 2013, I viewed DTV as an excellent way to generate above average capital gains with minimal risk. DTV management was using the tremendous amount of FCF it was generating to repurchase as many shares as possible. The predictable nature of their revenue stream combined with unusually low interest rates allowed them to amplify their aggressive repurchase plan by taking on additional debt. The plan worked marvelously as DTV went from 1.385 billion shares in 2005 down to 504 million by the end of 2013.
I have decided to part ways with DTV as the potential gain to be realized in the shares if the deal is approved fails to outweigh the potential downside. I am looking to replace DTV with a company that is aggressively repurchasing its shares without being so capex heavy. I would ideally like a rising dividend to boot, yet this requirement isn't necessary. I believe I have found a suitable replacement in Viacom Inc. (NASDAQ:VIAB).
"Viacom is home to the world's premier entertainment brands that connect with audiences through compelling content across television, motion picture, online and mobile platforms in over 160 countries and territories. With media networks reaching approximately 700 million global subscribers, Viacom's leading brands include MTV, VH1, CMT, Logo, BET, CENTRIC, Nickelodeon, Nick Jr., Teen Nick, Nicktoons, Nick at Nite, COMEDY CENTRAL, TV Land, SPIKE, Tr3s, Paramount Channel and VIVA. Paramount Pictures, America's oldest film studio and creator of many of the most beloved motion pictures, continues today as a major global producer and distributor of filmed entertainment."
VIAB contains quite a formidable array of content that is in demand the world over. As T and DTV merge to gain scale in delivering paid content to subscribers it has become abundantly clear to me the real power resides in those who can consistently produce the content we willingly pay for. VIAB channels, in my view, contain something for almost every audience, ranging from cartoons for my children delivered via Nick Jr to the blood and guts of MMA fighting via the Spike network.
What appeals to me as an investor is the predictability of VIAB revenues along with how aggressively its management is rewarding shareholders. Philippe Dauman, CEO of VIAB, has done a masterful job over the last couple of years in returning value to shareholders in the form of share reductions and annual dividend hikes. VIAB has reduced the shares outstanding by over 40% since 2008, as Mr. Dauman has astutely taken advantage of low interest rates to aggressively retire shares outstanding. Not to be outdone, the dividend was recently hiked 10% to 33 cents per share which undoubtedly made shareholders happy.
What really caught my eye was the following excerpt taken from the company's most recent 10-Q which detailed its share repurchase plan.
During the six months ended March 31, 2014, we repurchased 20.3 million shares of Class B common stock for an aggregate purchase price of $1.7 billion. From April 1, 2014 through April 30, 2014, we repurchased an additional 2.3 million shares for an aggregate purchase price of $192 million, leaving $8.008 billion of remaining capacity under our program. Share repurchases under the program are expected to be funded through a combination of debt and cash generated by operations, as deemed appropriate.
Based on its current market cap of $32 billion, VIAB is looking to retire an additional 25% of shares outstanding over the next few years. The size of the share repurchase plan in my view offers a floor under the share price, as the company will look to aggressively repurchase shares if they drop precipitously. By swapping DTV for VIAB, I am trading a redistributor of content with very constrained pricing power for a creator of content. Both DTV and VIAB amply reward shareholders via share repurchases with the difference being VIAB also pays a dividend that is has been raising 10% a year for the past couple of years. Not a bad deal at all.
HISTORICAL DIVIDENDS of Viacom
|May 21, 2014||Jun 11, 2014||Jun 13, 2014||Jul 1, 2014||0.3300||Quarterly, Cash|
|Jan 16, 2014||Mar 12, 2014||Mar 14, 2014||Apr 1, 2014||0.3000||Quarterly, Cash|
|Total dividends in 2014:||0.6300|
|Nov 13, 2013||Dec 11, 2013||Dec 13, 2013||Dec 31, 2013||0.3000||Quarterly, Cash|
|Jul 23, 2013||Sep 11, 2013||Sep 13, 2013||Oct 1, 2013||0.3000||Quarterly, Cash|
|May 22, 2013||Jun 12, 2013||Jun 14, 2013||Jul 1, 2013||0.3000||Quarterly, Cash|
|Jan 17, 2013||Mar 13, 2013||Mar 15, 2013||Apr 1, 2013||0.2750||Quarterly, Cash|
|Total dividends in 2013:||1.1750|
|Nov 14, 2012||Dec 12, 2012||Dec 15, 2012||Dec 31, 2012||0.2750||Quarterly, Cash|
|Jul 24, 2012||Sep 12, 2012||Sep 15, 2012||Oct 1, 2012||0.2750||Quarterly, Cash|
|May 23, 2012||Jun 13, 2012||Jun 15, 2012||Jul 2, 2012||0.2750||Quarterly, Cash|
|Jan 18, 2012||Mar 13, 2012||Mar 15, 2012||Apr 2, 2012||0.2500||Quarterly, Cash|
|Total dividends in 2012:||1.0750|
|Nov 9, 2011||Dec 13, 2011||Dec 15, 2011||Jan 2, 2012||0.2500||Quarterly, Cash|
|Jul 26, 2011||Sep 13, 2011||Sep 15, 2011||Oct 3, 2011||0.2500||Quarterly, Cash|
|May 25, 2011||Jun 13, 2011||Jun 15, 2011||Jul 1, 2011||0.2500||Quarterly, Cash|
|Jan 13, 2011||Feb 24, 2011||Feb 28, 2011||Apr 1, 2011||0.1500||Quarterly, Cash|
|Total dividends in 2011:||0.9000|
|Nov 11, 2010||Nov 26, 2010||Nov 30, 2010||Dec 30, 2010||0.1500||Quarterly, Cash|
|Jul 27, 2010||Aug 27, 2010||Aug 31, 2010||Oct 1, 2010||0.1500||Quarterly, Cash|
|Jun 9, 2010||Jun 17, 2010||Jun 21, 2010||Jul 1, 2010||0.1500||Quarterly, Cash|
|Total dividends in 2010:||0.4500|
In conclusion, the T/DTV merger is an intriguing one, as two providers of pay TV look to a merger to gain better negotiating power with the creators of content such as VIAB. I am anticipating gains similar to what has been seen with DTV over the next few years from VIAB as their franchises continue to perform. I would like to thank you for reading and I look forward to your comments.
Disclosure: I am long T, VIAB. 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.
Additional disclosure: Thank you for reading the article. Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.