Thursday, February 26, 2009

The Demise of the Newspaper Industry

Yesterday Gannett slashed its quarterly dividends by 90% to $0.04/share. The company is responding to the recession in US and UK by reducing the payout to shareholders, which will save it close to $325 million/year. The new dividend is a cent and a half lower than its first dividend in 1967 of $0.054/share. The move comes about a month after company executives said they would meet to evaluate the dividend.

The most recent cut ended a streak of 39 consecutive dividend increases for this dividend aristocrat. I initiated a small position in Ganett back in May 2008. The first signs of trouble came in July when the company stopped increasing its dividends. Since it was well covered I just let dividends reinvest. As the market tanked I sold some covered calls, in order to recoup some of my investment back.

With the most recent dividend cut I sold near yesterdays open. I see further deterioration in Gannet’s newspaper business. The company doesn’t seem like a value proposition either, given the large portions of goodwill on its assets side of the balance sheet.

This marks the third dividend cut for the year for a member of the dividend aristocrats. There have been 12 dividend increases so far in 2009 on the other hand.

The newspaper industry has been hit hard by increased online competition and the economic crisis. Traditional media companies have been left with declining sales and profits and have had to cope by reducing workforce and cutting or suspending dividends altogether.

Just a week ago the New Times (NYT) suspended its dividends, after reducing the quarterly payments from $0.23 to $0.06/share in November.

The McClatchy Company (MNI) is another example of a newspaper company in trouble. In September 2008 the quarterly dividend was cut in half to $0.09 in an effort to preserve cash. In January however, the company announced a suspension of its dividend payments.

Before the early 1990’s the newspaper industry was doing very well, earning monopoly like returns. Here’s an excrept from Berkshire Hathaway’s 1991 letter to shareholders, explaining why newspapers were a wide moat business in the past:

"The industry’s staggering returns could be simply explained. For most of the 20th Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were theeasiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets.

The great majority of families therefore felt the need for a paper every day, but understandably most didn’t wish to pay for two. Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages. This circularity led to a law of the newspaper jungle: Survival of the Fattest.

Thus, when two or more papers existed in a major city (which was almost universally the case a century ago), the one that pulled ahead usually emerged as the stand-alone winner. After competition disappeared, the paper’s pricing power in both advertising and circulation was unleashed. Typically, rates for both advertisers and readers would be raised annually – and the profits rolled in. For owners this was economic heaven."

The thing that is most important, as a dividend growth investor is that sectors and stocks come and go and not one thing is certain. One has to remain flexible and not concentrate his/her portfolio holdings in just a handful of stocks from similar sectors.

For example in 1989, the number of companies in the dividend aristocrats index was only 26. Only 7 of the original companies still remain in the index right now. The companies are: DOV, EMR, JNJ, KO, LOW, MMM and PG. Even buy and hold investors should expect some turnover. The percentage of companies that remain in the index after 10 years is about 30%. There have been about 116 companies that have gone through the index for the 15-year period form 1989 to 2004.

In addition to that, one has to constantly look for new additions to their dividend portfolio, which could turn out well for them. Investors should never “get married” to a position. If the position does not perform as well as you expected, it is ok to sell, even if you are a buy and hold investor.

The best investment is always ahead of you, not behind you.

Relevant Articles:

- Historical changes of the S&P Dividend Aristocrats
- Gannett Co (GCI) Dividend Analysis
- Gannett (GCI) leaves dividend unchanged at $0.40/quarter
- When to sell my dividend stocks?

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