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Gannett (NYSE:GCI) has an impressive dividend yield of 5.3%, coupled with a share repurchase program. We advise investors to buy GCI to benefit from the $1.3 billion that the management has stated it wants to return to shareholders by 2015, through dividends and share buybacks. The company is also taking new initiatives that can bring profits.

Gannett is divided into the following segments: Publishing (dealing with newspapers), Digital (mainly dealing with websites regarding recruitment and advertising), and Broadcasting (involves TV stations and a news and entertainment network). It publishes various daily newspapers in the U.S and U.K, including "USA TODAY"

GCI has beaten analyst estimates for EPS in the last three quarters, and earnings are expected to grow by 4% for the next 5 years. The company has taken some new initiatives to drive future growth, like new digital marketing services and "access content subscription model" for its publishing segment (that can benefit the currently under pressure publishing revenues). Meanwhile, GCI's diversification into broadcasting and digital segments is driving growth.

Dividend Analysis:

Gannett has a dividend yield of 5.3%, primarily attributable to the fact that the company increased its dividend by 150% from an annualized $0.36/share to $0.80/share in February 2012. The dividend is sustainable because the free cash flow yield is 15%, while the payout ratio is only 33%.

Below is a chart showing the quarterly dividend history for Gannett:

The cash dividend coverage ratio (operating cash flow/cash dividend) is almost 4x. For the more conservative investor, CAPEX cash dividend coverage ratio can be seen (operating cash flow/CAPEX+Cash Dividend). CAPEX over the last year was approximately $82 million. The ratio comes out to be 2.7x (showing that operating cash flows can cover both CAPEX and dividends). The company too, in its 10Q, stated that it intends to fund CAPEX, interest, repurchases and dividends through cash flow from operations. In case of debt maturities and acquisitions, the company can use a combination of operating cash flows and a revolving credit facility. $664 million is available through the said facility as of June 24, 2012. The company can also take on $1 billion of additional debt without violating any credit agreement.

The company has a long term debt-to-equity ratio of 70%. The earliest principal payment on bonds/notes to be made is in 2014, which is $249 million. In 2015, $317 million in principal payments will be due. The interest coverage ratio for GCI is a healthy 6, showing that earnings can easily cover interest payments.

Valuations:

Gannett has forward P/E of 7x as compared to The McClatchy Company (NYSE:MNI)'s 3x and The New York Times Company (NYSE:NYT)'s 14x. Below are the valuations at P/E of 7x. Investors should note that there is also a potential of expansion in valuation multiples which can drive the stock price up.

MNI's EV/EBITDA is 5.5x, while NYT's EV/EBITDA multiple is 4x; GCI's multiple is 5x.

The graph below shows the YTD share price performance for GCI, MNI and NYT.

The company may not have a lot of upside since we saw some insider selling in late August at prices of $15.36 and $15.44. The current share price is $15.7, while the 52-week range is $8.28-$16.26.

The short ratio for GCI is 6.8 days (11% of float is short) compared to MNI's 55 days (39% of float is short) and NYT's 11.2 days (13% of float is short). This fact, and the graph given above, both show that investors are more bullish on GCI as compared to its peers in the newspaper business.

GCI also engages in share repurchases. It spent $81 million in the first six months of this year on repurchases. The Board of Directors had authorized a $300 million share repurchase program in February 2012, with the target of completing it in the next two years. This means that $219 million are left to be spent in the next one-and-a-half years.

We recommend buying GCI based in its share repurchase program, dividend yield, and improved expected performance as compared to its peers. To reiterate, according to last quarter's 10 Q, "The company expects to return more than $1.3 billion to shareholders by 2015."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Consumer Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article

Source: Gannett's Sustainable 5.3% Dividend Yield And A Shareholder Friendly Management Makes It A Buy