It is no secret that the print media and publishing industry is in the midst of a transition to digital media from the traditional print format. Book, newspaper, and magazine publishers all face near-term pressure as their readership make the shift in format and the publishers develop business models that reflect the changes we see. In the meantime, publishers experience declines in revenue and profits from their old model even as they invest in the new. However daunting these challenges may be, some companies stand out as potential long-term winners and offer the patient investor significant rewards for having faith. Meredith Corp. (MDP) is one such example, especially for those investors interested in a company with a long history of offering dividends, dividend growth, and high yield.
Meredith is best known for its collection of magazines directed to women. The following is taken from the company's website:
"Meredith is the leading media and marketing company serving American women. Meredith features multiple well-known national brands - including Better Homes and Gardens, Parents, Family Circle, Ladies' Home Journal, Fitness, More, American Baby, Every Day with Rachael Ray and FamilyFun - along with local television brands in fast-growing markets. Meredith is the industry leader in creating content in key consumer interest areas such as home, family, health and wellness and self-development. Meredith uses multiple distribution platforms - including print, television, online, mobile, tablets, and video - to give consumers content they desire and to deliver the messages of its advertising and marketing partners."
The company is also distinguished by what it labels as its "Total Shareholder Return" strategy. This strategy has three components: a high dividend payout, share repurchases, and investing in new areas to generate growth in revenues, operating profits, and free cash flow. In 2012, Meredith acquired Allrecipes.com, a digital food site and launched new tablet and mobile applications.
The company's fiscal year ended June 30, 2012. For the fourth quarter, the company reported record readership of 116 million, and traffic to its websites doubled to 40 million unique visitors per month. The Local Media Group grew revenue by nine percent and operating profits rose 42 percent. The National Media Group grew by a more modest five percent with circulation increasing by 20 percent. Digital advertising revenue increased 95 percent.
Total revenue for the year was $1,376.687 million as compared to FY11, when total revenue was $1,400.480 million. The National Media Group contributed $1,060.385 million or 77 percent of total revenue in FY12 about the same percentage as in 2011. The Local Media Group contributed the remaining 23 percent of revenue.
Year over year, revenue for the National Media Group declined by 1.7 percent and 1.8 percent for the Local Media Group.
For the 4th quarter, revenue increased by 6.1 percent to $374.548.
Analysts are forecasting FY13 revenue to fall in the $1,465.9 million to $1,494.1 million range and the average estimate is $1,479.35 million.
Fiscal year 2012 income from operations totaled $185.771 million, or 17.5 percent less than in 2011. On a quarterly basis, income from operations dropped by 0.3 percent. The National Media Group saw a 23.2 percent drop in operating profit whereas the Local Media Group saw a 42.1 percent increase.
Earnings per share in 4Q12 decreased to $0.67 from the year-ago quarter of $0.73. For fiscal year 2012, EPS declined to $2.31, including a special charge of $0.19 per share recorded in the third fiscal quarter compared EPS of $2.88 in FY11.
Analyst estimates for FY13 range from $2.73 to $2.94 and average $2.84. This implies the analysts expect FY13 earnings to grow about 33 percent. Meredith provides guidance for EPS in the $2.60 to $2.95 range.
The company's gross margin of 60.2 percent is consistent with the gross margin experienced in FY11 and well above the five-year average of 58.0 percent. Operating margins slipped to 13.5 percent in FY12 from 16.1 percent in FY11 but remain above the five-year average of 9.8 percent. Net margin decreased to 7.6 percent compared to 9.1 percent in FY11 but above the 5.06 average.
The company carries about $25.8 million in cash and $275.0 million in long term debt on its balance sheet. Working capital is negative, which gives us some concern but is consistent with Meredith's operating history. Long-term debt is about 3.3 times free cash flow. Meredith's debt to EBITDA ratio is 1.6X and the weighted average interest on the debt is 3.8 percent. Debt had increased by $175 million to $380 million (including $105 million for the current portion of long term debt) on June 30, 2012 reflecting borrowing to purchase Allrecipes.com.
The long-term debt to total capital ratio is 25.7 percent and the long-term debt to equity ratio is 34.5 percent. Times interest earned is 14.4X. These ratios suggest that Meredith is not overextended. The company has interest expenses of about $12.9 million and free cash of about $146.2 million.
With a Return on Equity of 13.2 percent compared to the industry median of 7.2 percent, Meredith appears to be very profitable. I also look at Return on Invested Capital. For the TTM, ROIC was 10.0 percent compared to the industry median of 2.55 percent. Meredith's five year average ROIC is 8.3 percent compared to the industry median of 3.3 percent.
Earnings are one thing but cash can confirm the story. Meredith has a Cash return on Invested Capital of 12.42 percent compared to the industry median 9.86 percent.
One approach to evaluating shareholder friendliness is to examine a company's capital allocation. Meredith has paid a dividend for 65 straight years and increased its dividend for 19 consecutive years. The current indicated dividend, $1.53 represents a 44.6 percent increase over the past year. Our concern here is that with a payout ratio of about 66 percent of earnings, will Meredith be able to continue increasing the dividend? This will depend on how well it executes its plan to grow earnings. We take some comfort in that the dividend represents about 47 percent of free cash.
The company also has a $100 million share repurchase program. It already repurchased about one million shares or 2 percent of outstanding shares, at an average price of $27.55 and has about $87 million available under the current repurchase authorization. With a current dividend yield of more than 4 percent and a 2 percent share buyback, the investor is getting a 6 percent total yield.
One might say that valuation is in the eye of the beholder. Meredith has a PE of 15.7X which is in line with the market and a PE to estimated EPS of a more modest 12.8X. As seen above, the company sells at a premium to its industry median on a price to sales and price to book basis. This premium may be due to the market expecting better earnings growth or it may be attributed to the relatively high dividend yield.
On the basis of enterprise value to free cash flow, the company sells at a significant premium to the industry median. However, the EV/EBITDA ratio of 8.2X is at a small discount to the industry median of $8.45X.
Meredith is a financially healthy company going through a rough transition from the traditional print media business to the new digital age. I think it has a plan that it is executing well. While I wait, I get a substantial stream of income from dividends with a growth potential as a kicker. The company is buying back its shares, which is also shareholder-friendly. For the patient investor, Meredith is a keeper.
Disclosure: I am long MDP.