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Dividend cut alone can’t save Yellow Media Add to ...

Yellow Media Inc. slashed its annual dividend from 65 cents to 15 cents this morning to re-direct cash flows to its massive debt load. The telephone-directory publishing firm also announced that it would change its payment period, switching from monthly to quarterly distributions, and would also halt its share buybacks for the time being.

Although the stock is down big in early morning trading, the changes are actually good news for investors because they show that the company is thinking about the long-term. That was debatable when it sold off Trader Corp. for $745-million back in March because Trader was the company’s best asset and its absence would strip away some much-needed cash flows.

But looking out to the future, is a dividend cut enough to save the company, or at the very least, enough to buy some breathing room? Before the decision, analyst Tim Casey at BMO Nesbitt Burns ran some numbers and found that about a 75 per cent cut to the annual dividend, bringing it down to around 15 cents per share, would only decrease leverage to three times earnings before interest, taxes depreciation and amortization heading into 2013. That isn't much lower than the level of 3.7 times that got the company into trouble earlier this year.

No doubt, a lower dividend will offer some relief. Before slashing the dividend, Yellow Media was paying out $350-million annually in distributions to shareholders. That number will now fall to about $80-million, saving around $68-million a quarter that can be re-directed to the debt load.

However, the company's problems are more systemic than just its leverage. Without Trader, Yellow Media has said it will focus on building an online business out of its small real-estate division. A dividend cut will buy some time to do just that, but the company has to hope that print fundamentals don’t continue falling off a cliff so that it has at least some cash flows to fund the transition.

So far, the numbers aren't encouraging. After stripping out Trader Corp.'s operations, revenues last quarter fell 5 per cent from the same period in 2010, and EBITDA dropped a big 13.5 per cent. Those drops could very well be the reason why investors are disappointed this morning.

Follow on Twitter: @timkiladze


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