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March 23, 2007

Desperate Times at the NYT

Thomas Lifson
The drama at the New York Times Company just got a lot more interesting. In the face of declining revenues and profits, reported earlier this week, the company announced yesterday that it would increase its dividend by almost a third (31%), from 17.5 cents a share to 23 cents a share.

The move smacks of desperation, an effort to prop up a stock price that has lost more than half its value over the past five years. The stock price took a jump when trading opened this morning, but has since lost almost half of that initial gain.

The company's announcement contains some very interesting language:
"The strong cash flow of the Company and our current financial position, with the upcoming sale of our broadcast unit and radio station, give us the ability to return more capital to shareholders. Recognizing that the media marketplace is in the midst of an extraordinary transformation, we will continue to exercise strong financial discipline as we execute on our business strategy and allocate capital. We value our shareholders' support and continue to be focused on improved performance."
Some companies, for example certain tanker operators, return capital to their shareholders when they enjoy strong earnings above the need for reinvestment in continuing operations. But ordinarily, returning capital to shareholders is regarded as a slow motion liquidation.

For the year 2006, the New York Times Company reported a net loss of over half a billion dollars, or $3.76 per share. A write-off of $843 million dollars on its ill-conceived purchase of the Boston Globe and other New England media properties was partially offset by a capital gain on the sale of its television station group. The net result is that while continuing operations do continue to be profitable and generate cash, the downward trendline has not been reversed. The company shows no signs of increasing prosperity, only decline.

As analyzed at American Thinker, the strategy employed by the company to counter the declining fortunes of its print media is not panning out. Internet advertising revenues are growing far slower than they need to, in order to balance out the declines in print.

What this all boils down to is: the company is slowly liquidating itself, as it in fact admits with the telltale phrase "return more capital to shareholders." Pinch Sulzberger is in effect admitting that he cannot use the company's capital as effectively as shareholders could for themselves. Considering how he squandered capital on the Boston Globe, and how he paid over four hundred million dollars for About.com, a company which earned just over $6.5 million last year (a rate of return of about 1.6% a year on its investment) and which is growing only 23.4% a year and faces considerable business risk, this is a refreshing and valuable admission.

Despite the rosy tone of the company's verbiage ("strong cash flow"), Standard & Poor's isn't fooled. It has announced that

The dividend increase is being made "at a time when the financial profile is currently weak for the rating," S&P said in a statement.

"In addition, ongoing challenges within the operating environment have affected year-to-date operating performance, and the company has a heavy near-term capital expenditure plan," S&P said.

S&P rates the New York Times' senior unsecured debt "BBB-plus," the third lowest investment grade rating.
If S&P lowers the debt rating two notches, as Moody's did a year ago, then the Times debt will be one step above junk bond rating.

The Times will hold its shareholder meeting at the New Amsterdam Theatre in New York City at the end of this month. It should be quite a spectacle. The company's pre-emptive return of capital to shareholders will buy it some time with angry holders. But it is not a sign of health.

Update:

Standard & Poors followed through and has put The New York Times Company on its "credit watch list."


"The CreditWatch listing reflects a dividend increase at a time when the financial profile is currently weak for the rating," said Standard & Poor's credit analyst Peggy Hwan Hebard. "In addition, ongoing challenges within the operating environment have affected year-to-date operating performance, and the company has a heavy near-term capital expenditure plan."  [....]

Standard & Poor's cautioned that the New York Times' dividend move could cause its rating to drop to "BBB", only two notches above junk status due to the company's operating environment and a heavy near-term capital expenditure plan.

But despite Hebard's warnings investors rallied behind the Times' move, pushing the Class A shares of the news publisher up 2.4 percent, or 55 cents, at $23.78 in mid day trading in New York.
Thomas Lifson is editor and publisher of American Thinker, and holds an MBA from Harvard Business School, where he was also a professor.

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