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yield hog

Corus Entertainment's headquarters in Toronto.Cole Burston/The Canadian Press

I like a juicy dividend as much as the next investor. But when a yield climbs to a number that you can't even count on both hands, it's a sign that something is seriously wrong.

Case in point: Corus Entertainment Inc.

Shares of the TV and radio broadcaster, specialty-channel operator and children's-content creator plunged last week after it announced disappointing fiscal first-quarter results, hurt by a 4-per-cent downturn in TV ad revenue. The results underlined the challenges facing the TV industry in the age of Netflix, YouTube and Facebook and prompted analysts to slash their earnings estimates and ratings on Corus's shares.

Even before the sell-off, Corus was yielding more than 10 per cent, a level that should have given investors a bad case of sweaty palms. Now, the yield has climbed to more than 13 per cent, which screams "danger." If you think you can earn 13 per cent without the risk of further share price declines, a dividend cut, or both, I have some oceanfront property in Saskatchewan to sell you.

Corus probably won't take any action on the dividend immediately. On the first-quarter conference call, chief financial officer John Gossling said the company plans to "maintain our commitment to the dividend of $1.14 [annually] per class B share for fiscal 2018."

Asked later in the call if the company might consider cutting the dividend to free up cash for reinvestment or debt reduction, president and chief executive officer Doug Murphy reiterated that maintaining the dividend "has been one of our key financial objectives for 2018. And we'll remain focused on achieving that objective through the end of our fiscal year."

It was telling that management made no commitment to the dividend beyond fiscal 2018, which ends in August. Given the outsized yield, and the need for Corus to invest in content and new ad-delivery technologies to compete in the digital age, analysts say a dividend reduction is likely, barring a sudden turnaround in the company's fortunes.

"While management remains committed to the dividend for now … given the growth constraints for Corus' asset base and structural change risks, we believe that the company may be hard-pressed to maintain such a payout over the longer term," CIBC World Markets analyst Robert Bek said in a note in which he reiterated a "neutral" rating on the shares.

Another challenge is the company's $1.98-billion debt load (as of Nov. 30). Corus had been aiming to reduce its net debt to three times EBITDA (earnings before interest, taxes, depreciation and amortization) by the end of fiscal 2018, but in light of the weak first-quarter results the company said it is unlikely to meet that target.

Corus does have some breathing room. According to RBC Dominion Securities analyst Drew McReynolds, the estimated dividend payout ratio for fiscal 2018 is 82 per cent of projected free cash flow (after mandatory debt repayments). Taking into account the company's dividend reinvestment plan (DRIP), which allows Corus to issue shares instead of paying dividends in cash, the 2018 payout ratio drops to an estimated 68 per cent.

But with Corus's cash flow expected to fall, the payout ratio is poised to rise to 88 per cent pre-DRIP and 73 per cent post-DRIP in 2019, according to Mr. McReynolds's estimates. "While we respect management's intention to meet its commitments … lowering the dividend to accelerate de-levering/reinvestments, given rising structural headwinds, would lower the risk profile of the stock," said Mr. McReynolds, who rates Corus "sector perform."

Analyst sentiment toward the company has deteriorated along with Corus's results. Of the 10 analysts who follow the stock, nine rate it a "hold" or equivalent, and one has a "sell," according to Thomson Reuters. The five analysts who had been recommending the shares pulled their "buy" ratings after the weaker-than-expected first-quarter results.

One of those analysts was Maher Yaghi at Desjardins Securities.

"We are still bearish on the general TV industry in Canada and we also believe that the absence of sports content weighs on the company's ability to grow its TV revenue," Mr. Yaghi said in a note. This year could be especially challenging in that regard, with the Winter Olympics and soccer's World Cup potentially hurting Corus's viewership and ad revenue, he said.

In light of the disappointing first quarter, Mr. Yaghi reduced his estimate for Corus's TV ad revenue in 2018 to a decline of 3 per cent. Previously, he expected TV ad revenue to be flat.

None of this should have come as a complete surprise to investors. Corus has not raised its dividend since January, 2015 – a sign all was not well. Since then, reflecting the seismic shifts in media and advertising, the stock has skidded more than 60 per cent.

As far as the dividend is concerned, there are plenty of precedents here. Companies such as Yellow Pages, AGF Management and TransAlta sported yields in the double digits before they slashed their dividends. Corus' 13-per-cent yield is telling you the market expects a similar outcome this time.

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