Corus Entertainment Inc. slashed its dividend, took a $1-billion impairment charge and saw its share price plunge to a record low on Wednesday. With so much bad news weighing on investors, is there now a compelling case for taking a flyer on this troubled broadcaster?
It’s certainly challenging to construct a bullish case given the long list of problems facing the company, but investing at the point of maximum pessimism sometimes has its rewards.
Just look at how far Bombardier Inc. and BlackBerry Ltd. have rallied from their respective lows (they’ve more than doubled).
Corus is a conventional media company operating at a time when convention is being turned upside-down. Netflix and other streaming services are transforming traditional television-watching habits, while advertising dollars are fleeing to Google and Facebook.
The company’s television revenue fell almost 5 per cent in the fiscal third quarter from the previous year. Revenue from radio – a medium with its own share of problems – fell just more than 2 per cent. Corus also booked a non-cash charge during the quarter, related to the value of its broadcast licences and goodwill, of more than $1-billion.
Reflecting its troubles, Corus whacked its dividend. It will now pay an annualized dividend of 24 cents a share, down from $1.14 a share previously – a near 80-per-cent reduction.
Put another way, the unsustainable dividend yield of more than 18 per cent has been brought down to 4.4 per cent.
Chief executive Doug Murphy has bold plans for stabilizing Corus, which includes cutting costs, paying down debt and diversifying its content.
But even he’s not willing to commit to cost-saving targets: “I’m not going to give you any numbers as guidance, because the industry is far too disruptive at the moment to do that,” Mr. Murphy told an analyst during a conference call on Wednesday morning.
To make matters even more baffling for investors, Corus is in the midst of a shareholder shakeup. Shaw Communications Inc. is the majority shareholder, with a 38-per-cent stake. But as my colleagues pointed out two weeks ago, Shaw has hired TD Securities Inc. to find a buyer for its stake.
This sale process is also hanging over investor sentiment toward Corus, given that analysts warn that a deal won’t be easy: Foreign-ownership restrictions and domestic competition issues rule out the usual suspects as buyers.
Corus shares closed on Wednesday at $5.13, down 18 per cent for the day. The shares have tumbled 80 per cent over the past four years, making it look like a typical victim of disruption.
But Corus isn’t a lost cause. Set aside the impairment charges during the quarter (to get a sense of the company’s operational strength) and adjusted profit was 37 cents a share, up from 35 cents a share last year.
Corus also generates impressive levels of cash from its operations, which gives it some financial flexibility to pay down some $2-billion in debt, a key commitment from management. Free cash flow increased to $87.7-million during the quarter, up 6.3 per cent from last year.
Not convinced that this makes Corus a buying opportunity?
Well, the real attraction to Corus isn’t the belief that the shortsighted market refuses to acknowledge the company’s attractive intrinsic value, but rather the admittedly hazy belief that things can’t get much worse.
The severe dividend reduction could mark the stock’s nadir. Bitter long-term investors, who had counted on those big monthly distributions, could be replaced by a new shareholder base that is more interested in turnaround ideas than steady dividends.
This is now a stock that is likely to move on cost-cutting success, meaningful debt reduction and clarity from Shaw. But don’t wait for stability to return to the television sector; if it ever does, the stock isn’t going to be this cheap.
David Berman