ViacomCBS: A Sleeping Giant And Undervalued Dividend Growth Stock

Summary

• ViacomCBS was formed in the 4th quarter, when Viacom and CBS merged, forming one of the largest media companies in the world.
• ViacomCBS contains iconic media outlets, such as MTV, VH1, CMT, Comedy Central and Paramount Pictures.
• VIacomCBS recently announced a 33% dividend increase and is currently yielding 3.93%, causing dividend investors to take notice, as the share price has dropped significantly in 2020.

ViacomCBS (VIAC) has been catching quite a bit of noise recently, ever since the merger closed in the 4th quarter of 2019. That merger, in case you may not know, was between CBS and Viacom. There are 3 reasons that showcase that ViacomCBS may be an undervalued stock that should be on any dividend investor's radar.

First, the combined company now is one of the most incredibly put0-together media giants in the world. On one hand you have BET, MTV, VH1, CMT, Nickelodeon and then you also have Paramount Pictures, Showtime, CW and Comedy Central; not even including CBS.

Second, one would think that this behemoth would now stand to test the giants in the media space and reward shareholders. However, that does not seem to be the case for shareholders thus far, with the significant drop in share price (which we will discuss below).

Third, as most are looking at VIAC as a growth stock, such as a Netflix (NFLX), Apple (AAPL), Disney (DIS) or even Amazon (AMZN), I tend to have a different viewpoint of this media conglomerate. I am looking through a different set of lens, the lends of a dividend growth investor. I am looking at VIAC as a strong dividend growth stock, that is setting the stage for years to come of growth in revenue and stellar dividend increases. The evidence of them as a dividend growth company will be discussed further below and how there are strong signs of VIAC as being significantly undervalued.

ViacomCBS Financial Performance

ViacomCBS released earnings on Friday, February 20th. The reaction to their release has been troubling, as investors are focused on their net loss for the quarter, which I will discuss below, and not seeing the potential revenue giant ViacomCBS can be. My goal is to dissect their results and to show that on a go-forward basis, results will be better.

When reviewing the release, specifically the income statement, there are expenses that increased significantly. There was a significant increase in restructuring (up $292 million in the quarter alone, $285 million for the year over year comparison), as well as in operating expenses (up $547 million in the quarter alone, $1.3 billion for the year over year comparison).

The increases in these two categories totaled $839 million, which was a primary reason VIAC had a net loss for the quarter. If half of that is non-recurring, taking a conservative approach, they are showing net income easily for the quarter. Even with the net loss in quarter 4, they still showed $3.3 billion in net income for the year, only slightly down ($147 million or 4.25%) from the prior year. This tells me they are poised to show significant improvements in net income for 2020 versus 2019 with reduction of the one-time expenditures. There appears to be a reduction of one-time expenses, as this was a very large acquisition and normally one does not see another like this in the near term.

Further, and I need to point this out, their Paramount Pictures arm had a dismal year. Theatrical revenue was down 26%, year over year. With movies like Gemini Man, Terminator and Playing with Fire, it is no wonder the figure is down. They simply didn't have that blockbuster hit. Rocketman, though, was great from an award-standpoint, but was the lone title that received wide reception. Why do I bring this up?

2020 will be entirely different for Paramount Pictures. There are massive upcoming films to be released that global viewers are anxiously anticipating the release. 4 come to mind. Top Gun: Maverick, A Quiet Place Part II (Part I did ~$340M in Box Office Revenue), SpongeBob (last one received ~$325M in Box Office revenue) and Coming 2 America. These are 4 iconic brands and they are setting the stage for a wildly successful year on the theatrical front. As I am writing this, Sonic the Hedgehog (that was released two weeks ago - February 14th) has already grossed over $214 million worldwide, and as management stated, this film now holds the record for largest opening weekend for a video game. The growth in theatrical films that are set for significant results at the box office will more than likely increase this segment of revenue. The stage is most definitely set for Viacom.

Lastly, there is streaming. ViacomCBS already has their CBS All Access service. Not only do they already have millions of subscribers, adding two million in the last 12 months. Per management, they plan on bringing together Showtime, Pluto TV and Films that they own. In this industry, content appears to be key and CBS is one of the kings of content, no doubt. They have an incredible opportunity to use current/existing assets to increase subscriber base, all one one platform, thus increasing revenue. This should provide positive future earnings in the upcoming years.

In addition, I reviewed their balance sheet. VIAC has a current ratio of well over 1, at 1.31 (current assets over current liabilities). Not only that, but their quick ratio is even at 1, which is removing inventory from current assets and dividing that by current liabilities. During a financial crisis, that is key, as it allows you to remain flexible. Further, their long-term debt remained unchanged, even with the massive acquisition (as this was a stock deal); which has been rare in recent years (such as Kraft and Heinz, CVS and Aetna, etc.). Therefore, a fairly sound balance sheet from my perspective. Given that the acquisition is over, ViacomCBS does not have to focus their free cash flow on paying down new debt they had to take on, like other companies who acquire.

Even with the merger, one would thought that this would have had the same tendencies as a Netflix, Amazon or Apple. Tendencies such as significantly high valuations (Netflix trades at 63x earnings), an increasing stock price and volatility. However, that just hasn't been the case. Below is their stock price chart. You can see VIAC hit highs in the $42-43 range recently, down to $24.44 as of February 26, 2020, declining week after week.

Obviously the overall market has declined during the week of February 24th with the Coronavirus outbreak wreaking horrible havoc. However, VIAC started the year off on the decline.

If you look back at the open of January 1, 2020, VIAC started the year at $41.97. That means, in less than 2 months, the stock price has dropped 42%. Now, the overall market definitely has not done that. In addition, the sharp decline really occurred after the earnings release on February 20, 2020, which we went over above. To add further to the lack of correlation to what VIAC can be, as a media giant, they also increased their dividend to $0.24/quarter, up from $0.18/quarter. As a dividend investor, this has my attention.

Dividend Diplomats Stock Screener

Being a dividend investor, I also am concerned about valuation, payout ratio and dividend yield, with dividend growth. These 4 metrics will help in my determination if VIAC is an undervalued stock for my dividend portfolio. VIAC will have to have:

• Below 60% payout ratio
• Below 15 Price to Earnings (P/E) ratio
• Yield above 3.30% (my overall portfolio yield)
• Dividend growth rate above 7.00% (overall market dividend growth rate, on average).

Stock Price*	Dividend	Forward EPS**	Dividend Yield	Payout Ratio	3-Year Growth Rate	5-Year Growth Rate	P/E Ratio
$24.44	$0.96	$5.53	3.93%	17.4%	10%	10%	4.42

Click to enlarge

*Based on 2/26/20 Close

**Based on Yahoo! Finance

1. Price-to-Earnings (P/E) - Analysts are anticipating $5.53 in earnings. What does this mean? Well, you can see from the chart above, but the P/E ratio is 4.4. Yes, you can rub your eyes, as that figure is correct. They pass this metric with flying colors and they are surprisingly and significantly low.

2. Payout Ratio - I use a 60% target payout ratio as it is a demonstration of retaining earnings to grow their business and rewarding shareholders, at the same time. At a forward dividend of $0.96 per year and an expectation of $5.53 in earnings, this is a dismal 17.4% payout ratio. Therefore, VIAC has ample room to grow their dividend and their business. No wonder, as they will be using quite a bit to enhance their streaming service package with the merged entity.

3. Dividend Growth History and Rate - Now, VIAC is a newly formed entity, therefore, "history" is not technically there. In the 4th quarter last year, they did increase the dividend 33%. There was a pattern at CBS, where there was an increase every 3 years. History had demonstrated an average dividend growth rate of 10%. Given this, I am going to argue that VIAC passes this metric.

4. Dividend Yield - The dividend yield is almost 4% and is far above competitors and the S&P 500 index yield.

ViacomCBS Summary and Conclusion

The market has punished ViacomCBS, no doubt. It is not a normal occurrence that a stock drops over 40% in less than 2 months, it just isn't. However, I believe that their plan of execution is - to be a leader in the media transition space, by forming one giant, content-owning, conglomerate.

In addition and as stated earlier, their theatrical film releases in 2020 will set the stage for them, this year. Bringing the two forces together (Viacom and CBS) will also create incredible cost synergies, which management has increased to $750 million realized within 3 years (an increase from initial estimate of $500 million). Therefore, they will also be leaner. Lastly, with the endless amount of content - they have the ability to also be a major player in the streaming game.

Are they too late to the streaming game? I believe they are not late to the game, at all. Disney just came out with their last year and ViacomCBS has a great way to learn from mistakes from others. In addition, as a consumer, you try to get as much as you can for little. It appears that ViacomCBS will have a streaming package that is one of the most robust ones out there. I say this due to the massive amount of content that they have out there and the history of content. Further, there can be synergies here to have the content all one streaming platform, as the rumor has been swirling.

To end, I will say content will be king. ViacomCBS holds a crown of content and believe they will be rewarding shareholders for years to come. At current prices, their valuation and dividend metrics are too good to pass out and I plan on investing into their stock.

Please share your thoughts and feedback on the analysis and conclusion above. I would love to hear from everyone and look forward to the comments. As always, good luck and happy investing!

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VIAC over 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.

Comments

[crrj]

DEBT

[Reading61]

Like tesla and NFLX?

[happyperson]

The folks that move this stock have been speaking with action not talk. The folks that are talking this company up on SA have had no positive affect at all. Obviously things are much worse for this company than folks sharing here realize This stock goes down on bad days and goes down on days that the market is up over a 1000 points. This stock does not have the cash flow that they say it has. it has been going down for over 3years with the quickest drop being the last month. It was not the coronavirus that caused this big drop. It was the fundamentals of negative costs. There are much better companies than VIAC to invest your money in. I do feel bad for the many folks that purchased this company because they believed positive things shared on SA regarding VIAC that were partial truths. I do not think that was intentional. It is just so difficult to get the whole truth. There was a reason that this company has had falling stock prices for 3 years and it certainly hasn't changed. Granted, give it 3 years and it could be back to 24 and that would be a nice double if you bought tomorrow. There is still mega selling in this stock so wall street is making mega dollars to the downside with this stock. Wall street may decide in the future to make mega bucks with VIAC on the long side. I hope they do for the many retail investors that remain to hold from much higher prices. There is an old saying, "Follow what Wall Street does not what they say."

[southbeachguy42]

Well you forget anyone that bought below 17.5 is up over 50% in a short time plus a big dividend. I happen to get involved back at 38 earlier this year on 5,000 shares then averaged in at about 15 on 15,000 IRA shares. Silly to make such strong statements unless a stock is at a 52 week low. I think it is hard to argue that VIAC is not a reasonable value stock at these levels.

[simply_divs]

Those of you who say to do the opposite of what Jim Cramer says.....here's your chance.

[spvm]

Absolutely this company is really sleeping but not sure whether this is giant or not with in an year. I was little early to jump into the ship at 27 (basic starter position) but I will wait to average it down

[User 50432469]

Looks like the company has gone into hibernation.

[Orangejulius]

I'm really curious to see where the bottom is for VIAC. it must be devastating to investors who thought they'd turn the corner after the merger. I myself was tempted to buy in the low 40's. I'm glad I didnt buy after I found out NAI had full control, and shareholders are basically held hostage by the Redstones.

I've watch this thing burn to the ground and really don't understand it. It has the appearance of a profitable, absurdly cheap company, but the market is expecting a collapse in earnings due to their business model being chipped away by streamers as well as mismanagement.

I feel like I may regret not buying a little in a year from now, but where is the bottom with this turd?

[Dave Wo]

If you haven't bought any yet, you might try buying 5-10 shares at this point. Not much money to lose there, and may have a decent upside once the market settles down. I bought too soon and have average cost of about $30. Dead money for awhile.

[KenB4Business]

Very good article, VIAC is a good comparison to Netflix when looking for value.
Going off of memory from my research.
VIAC has about 560M outstanding shares and NFLX around 440M.
VIAC is $22 a share and NFLX is $350+ a share.
NFLX is losing a majority of its content (DIS, FOX, etc.) and facing increasingly tougher competition (T, DIS, etc,) in the streaming market.
Both companies have almost the same revenues incoming.
NFLX has a higher Debt and the burden of needing to create substantial amounts of new content to replace its lost sources.
VIAC is one of the remaining suppliers of NFLX content and therefore has a cut of its profits and plays a role in the success of NFLX
VIAC has its own free cable-cutting platform called Pluto TV which has roughly 22 million consistent viewers in America, and those numbers are growing, in addition it is spreading this platform throughout the Americas (Brazil being the latest to see its release into the marketplace).
Unlike NFLX, VIAC is also a Dividend stock, an additional advantage to investors.
VIAC has only one direction to go... UP.
I wouldn't be betting my money on NFLX to do the same.
NFLX is over valued, it had a unique situation where it offered almost all entertainment content via its streaming service. That advantage is gone. NFLX is the Yahoo of its niche. It is bound to lose its dominance in the marketplace no matter what it does, as it loses content and competition builds up for customers.
VIAC meanwhile is collecting a large portion of the 'free' cable alternative with Pluto TV as well as offering its own paid for CBS streaming platform. As well as having Paramount and other sources of revenue.
THE PERFECT STORM
The bad news about the 4th after the merger drove the stock down, and then right on the heels of that came the current 'correction' we are in.
I project the stock is at 40% or less of where its value will be a year from now.
This is by far one of the best investments one can make at this time.

[Dollarsandcents]

"NFLX is the Yahoo of its niche" - very interesting comparison

[KenB4Business]

@Dollarsandcents I believe so, just as Yahoo once dominated the marketplace, and is now a minor player in it. I don't think Netflix will fall quite as far, but at some point it will only hold 20-25% of the marketplace, as customers move to Hulu+Disney, Amazon, etc.

[Dollarsandcents]

@KenB4Business = Melissa Myers is available to NFLX to speed the decline

[AlphaElephant]

Wow...a massively undervalued dividend grower right under my nose. Thank you for the article.  

More to read in this company, but I like what I see.  

Content is king, while delivery methods will continue to evolve.

[AlphaElephant]

And after reading all the hateful comments on this article, I’m getting even more interested.

[Newton100]

The CEO spoke at an investors conference and the audio is available on the company website. He said the virus has not had any material impact on the company so far. In addition, that the company is on track to meet guidance. It sounds like Q1 earnings will meet the low expectations. The second half of the year is supposed to be better.

[Dividend Diplomats]

Good to know!

[Newton100]

The stock has dropped 60% in the last four months. The market cap equals the amount paid for Viacom. Hard to imagine that this stock could drop significantly more than this in the near term. They should drop the Viacom in the name and just call the company CBS. The stock would go up 25% on the name change.

[happyperson]

Of course it has just dropped another 10%. If wall street continues to want to make money on the down side this will go lower. It will have little moves up but bigger moves down. This stock is not a big up mover. It has been moving down for 3 years. There is a lot of money that bought between 40 and 50 or higher who do not believe this stock will ever hit that price again. The dividend is not going to be the reason to hold the stock. They are and will be selling. Yes it is a great dividend stock to hold if you buy now, even if the stock goes to 10. You continue to get the dividend and maybe in 2 years it is back to 20. With the coronavirus still a serious problem, the oil situation, an over priced market and many earning's warnings I do not think we will have a V style recovery at this time. We have lived such an affluent lifestyle for so long we forget that difficult times do come. I may be wrong but I remain patient and in cash looking for lower stock prices.

[Reddy531]

The heck...just one of their shows "South park" was licensed to HBO for over 500 Million. How many of those do you need to add up $13 B. CBS has a bunch of sitcoms that are worth in this range. Any way you slice it this is a slam dunk 3-4 years down the road.

[Random Macro Analyst]

Dude that's their best show.

[S1974]

Here is the concern: BUAC does not seem to believe in the power of streaming, at least at this stage, preferring (as usual for them) a ST monetization play: hence, SouthPark goes to HBO Max streaming; Sponge Bob spin-offs go to Netflix; etc. nothing wrong to optimize the content rights, but It seems VIAC is deep diving into the content IP distribution play vs the bulls you assets strategy. Similar to NBCU’s for now (we’ll see with Peacock) and differently than Disney. The market does not like that, but I admit, this is one of the oldest discussions in Media history.

[gimmeecoffee]

Hmmmm, check out this story in a Spanish newspaper. Need to translate if you don't speak Spanish.

okdiario.com/...

[mm540]

This thing trades like March Madness will be played with no fans in attendance, just announcers and camera men, no more NFL games in front of crowds, loss of the NFL contract, no more studio movies being made for 6-9 months, and eventually a 1 for 5 reverse split. We need an Onions play for this stock right about now......

[Pooh_Lover]

RSI weekly is 20 and daily is 17. Those are numbers that are very very rarely ever seen. I'm talking ever. Especially the daily.

[Pooh_Lover]

This stock is officially AIDS. Very unhappy shareholder. On a down day we track the market. On massive up days we go flat or slightly down. What a POS.

[VanWelij]

That’s indeed the current sentiment, but the underlying fundamentals haven’t changed. If you liked it at $30 you should love it at $20.

[KenB4Business]

If you are a long term investor, this stock is gold. If your game is trading, you're a fool for investing in it.

[Regencyrick]

When the merger occurred, did 1 share of CBS became 1 share of VIAC? Please tell me that isn't true, and I haven't lost half of my investment since the merger! Please!

[alessandro.agnoletti74]

yes you have, but Is a loss on paper, will go back in 2-3 years at 50-60 $ again

[ErikProW]

0.5965 shares of CBS for every Viacom

[Regencyrick]

Thank you for responding. I couldn't find that info anywhere. So, if I had 100 shares of CBS, I now have 167.64 shares of Viacom? That doesn't sound quite as bad. I'm not a trader, so will wait it out.

[MadisonAv]

Taking the company private is starting to make sense at these levels... Never underestimate the Redstones. Always finding ways to screw over minority shareholders.

[FundamentalInvestor]

Wish they would try ... put it in play and then have someone with money come buy it the will run it prudently.

[Reading61]

How much money do you think they lost?

[kmeixner.km]

They had to halt the making of the new mission impossible movie in Northern Italy. Also some countries are temporarily closing theaters in fear of spreading the virus. Also they had a recent disappointed earnings report, thus no near term momentum.

[FROGBERT]

The key to VIAC as I have seen it, is the value of content,,content that consumers want..near term I thought COVID would drive some cord cutters back to cords to increase content as other entertainment options are avoided..longer term, either VIAC puts together a compelling set of streaming options or sells it's content through streaming options that come to dominate. In any event this appears to my to be a bargain that's sheltered from COVID risk and the market disagrees for reasons I don't understand. Could part of today's lack of rebound be related to reduced ad spend as the Dem primaries appear to be a done deal? Not clear to the extent ad spend drives value.

[FROGBERT]

Ad spend is 40% of revenues..so it is a big deal..As of 2/27 DEMS spent $1B with Bloomberg 54%..now he's out and spending will drop..until the election but that spend is going to show up in earnings this Q.
nypost.com/...
There's a lot of theaters closed in China and elsewhere, but Theatrical is only 2% of revenues..the movies will be released when theaters reopen and that content is saleable elsewhere

[nerd_rage]

Oh who doesn't have content consumers want? I can't get around to all the stuff in my Netflix and Amazon queues.

VIAC's problem is that they haven't spent the last several years building up a ridiculously large diverse library. They look puny by comparison with the competiton.

[KenB4Business]

VIAC in addition to having its paid-for streaming channel, has Pluto TV, which is very similar in platform to your Cable or Direct TV set up.
Pluto TV has over 250 channels and 75 partners... its a free streaming service that is just like Cable, and it is catching on across the Americas.
VIAC will be present in paid-for steaming, free streaming, Movie releases (Paramount), it supplies content to Netflix, and Cable/Direct TV.
VIAC is a more solid investment than NFLX or DIS but if you think those stocks are good investments you should really do your research on VIAC.

[S1974]

the 33% increase in dividend seems fiscally irresponsible, a boutade to try to grab some attention: 33% does not bring anything more than a 5-10% would have brought and the cash could have been better used to reduce debt or buy back shares below $23... this keep sinking...

[Pooh_Lover]

They didn't increase the dividend they combined the dividend from both companies. It's trading under the CBS chart that's why it shows it as lower before.

[S1974]

It keep being pounded: management should not react to Wall Street in panic, but should consider what is going on: clarify the strategy as a compelling one (enough with the laughable “we do it all and have PlutoTV to save the day”...); focus the CFO on delivering at least $1Bn in annualized synergies and push down/refinance the debt and ensure adjustment in dividends are done smartly with a return play, not to try to wow people