CBS keeps the dividends flowing


After drastically cutting its quarterly dividend a couple of months ago, shareholders have to be relieved that the board of directors at CBS Corporation has, for the second time, declared a dividend payout at the new rate of five cents per share. Meanwhile, the company also got some favorable credit rating news from Fitch.

The reassurance came in a short statement: “CBS Corporation today announced that its Board of Directors has approved a quarterly dividend on the Company’s common stock of $.05 per share. The dividend is payable on July 1, 2009 to shareholders of record as of June 10, 2009.”

A day after Standard & Poor’s said it was putting CBS on its “CreditWatch” list with an eye to a downgrade, a competing credit rating agency affirmed its ratings on CBS. Although Fitch Ratings expects EBITDA to decline for CBS Corporation’s radio and TV operations, it projects that the company will still have sufficient free cash flow to repay the $1.4 billion of debt coming due next year. Fitch concluded by saying its rating outlook for CBS is stable.

“Fitch Ratings has affirmed the following ratings:

CBS Corporation (CBS)
— Long-term Issuer Default Rating (IDR) at ‘BBB’;
— Senior unsecured at ‘BBB’;
— Short-term IDR at ‘F2’.

CBS Broadcasting
— Long-term IDR at ‘BBB’;
— Senior unsecured at ‘BBB’.

The Rating Outlook is Stable.

The ratings are supported by a strong presence in the top 25 U.S. markets, leading positions in first-run syndication, a robust library and pipeline of off-network syndicated programming and an increasing portion of carriage revenues. Concerns include an above average exposure to cyclical advertising revenue, weakening credit metrics and liquidity, technological threats within radio and television broadcasting, and a material maturity schedule over the next four years.

Fitch believes EBITDA declines will be in the 20%-30% range in 2009, resulting in gross leverage above 3.0 times (x). As such, the ‘BBB’ rating with a Stable Outlook is expected to be weakly positioned in the category while CBS endures the very dramatic and potentially protracted advertising downturn. The Stable Outlook reflects Fitch’s belief that CBS can handle its maturities (sizeable legacy issues put in place prior to the spin-off of the Viacom assets) while enduring this severe economic downturn. Fitch believes the operating declines CBS will face in 2009 compounded with Fitch’s belief of its ability to meet its maturity schedule are reflective of the type of stresses Fitch would expect an investment grade company to handle. In addition, on the other side of this extended downturn, Fitch believes CBS could face fewer competitors in its local markets, will have a lower fixed cost structure, will face a manageable debt maturity schedule and will carry a lighter absolute debt load with greater liquidity.

Negative rating pressure could result should Fitch’s expectations change regarding CBS’s ability and willingness to repay debt and build up liquidity. Also, while Fitch is cautious about 2010 and is not modeling a material rebound, Fitch does believe that pressure facing CBS is largely cyclical. While there are secular issues facing local TV and radio businesses, these risks are accommodated within the rating. Should Fitch become more concerned regarding an acceleration of additional negative secular trends, there could be negative rating implications.

The majority of pressure on CBS’s operations is expected to come from its advertising-based businesses which account for approximately two-thirds of total revenue. More specifically, businesses that are exposed to local advertising should continue to feel the most pressure. Fitch expects the one-third of revenue derived from non-advertising sources to remain fairly resilient through the downturn.

— Local/Regional Advertising Revenue (Local TV, Radio, Outdoor): Fitch estimates less than 35% of total CBS revenue is derived from local/regional advertising and believes this revenue stream is the predominant driver for the overall weakness at CBS. Obviously, auto advertising is a main negative driver and Fitch expects a large portion to be permanent. Beyond auto advertising, many of the other challenges facing CBS’s local advertising businesses appear more cyclical than secular as the company operates substantially in the top 25 U.S. markets, does not have any exposure to print-based products, its radio stations have a key presence in local news/talk/sports programming which should be more resilient to secular challenges, and its outdoor business should benefit from technological advances. Fitch continues to expect rationalization of advertising outlets in local markets (e.g., newspapers) and that the local elements of CBS’s portfolio are viable over the long term.

— National Advertising Revenue (CBS Network, National Spot Advertising on the Local Properties): Fitch estimates approximately 35%-40% of total CBS revenue comes from national advertising. While the majority of the national advertising revenue comes from the CBS Network, the portion that the local properties receive is material to each individual business and, importantly, the company’s overall cash flows. While cyclical national advertising remains a concern, especially in this environment, Fitch would expect it is more likely to rebound as the economy improves. CBS’s solid network ratings relative to its competitors should provide some offset to a challenging pricing environment. Long-term, Fitch expects CBS’s top 25 market presence of local properties will continue to keep it relevant with national spot advertisers.

–Non-Advertising Revenue (First-Run Syndication, Off-Network Syndication, Showtime and other Carriage Fees, etc.): Fitch expects CBS’s non-advertising revenue (approximately one-third of total revenue) to remain fairly resilient during this downturn. Potential Showtime cancellations are a moderate concern in this economic environment, however, Fitch would expect general stability over the intermediate term from CBS re-transmission fees, first-run syndicated programming, and off-network syndication cash flows. Home entertainment and publishing revenues could both be challenged over the intermediate terms but pressure can be accommodated within the context of existing ratings.

Fitch’s expectations are for 2009 EBITDA decreases for local TV, radio and outdoor to materially exceed the decreases in the fourth quarter 2008. Including CBS’s existing cash balances and Fitch’s expectations for free cash flow generation, the company should have the ability to repay $1.4 billion of senior notes maturing June 2010 (assuming modest use of CBS’s bank facility that could be repaid from second half 2010 free cash flow by the facilities’ December 2010 expiration date). Under the assumption of a flat to no growth environment in 2010, Fitch would also expect CBS to be able to handle its 2011 and 2012 maturities. Also, given CBS’s action to cut its dividend 80% in February 2009, Fitch considers the approximately $400 million in cumulative dividends between 2010 and 2012 to be at the company’s discretion should the credit markets be completely unavailable. Factored into Fitch’s assumptions includes the complete pay down of CBS’s A/R securitization facility and other working capital swings in 2009 (super bowl payment, A/R increases from new off-network licensing deals, severance, etc.) that Fitch would expect to normalize over the course of these maturities. While CBS has historically operated well below the 3x leverage target that Fitch has indicated for a ‘BBB’ rating, Fitch’s comfort range for leverage over the longer-term has diminished somewhat. Under normal conditions, going forward Fitch will be tightening its leverage target to 2.75x and below for CBS. While there is tolerance for cyclical, EBITDA-driven spikes in leverage above this level (as Fitch sees in this downturn), Fitch would have less tolerance at the ‘BBB’ rating level for debt funded acquisitions or buybacks that exceeded this level.

From a long-term secular standpoint, there are several issues facing each of CBS’s businesses that Fitch believes can be accommodated in existing ratings. Over the long-term, Fitch expects continued fragmentation of viewers across the media and entertainment landscape. All things being equal, Fitch would expect CBS’s Outdoor business (16% of revenue) to generally be unaffected by this trend. While CBS’s TV and Radio businesses will have to deal with further fragmentation, Fitch believes value will remain for those mediums that can still aggregate a meaningful audience and that weaker local mediums (print media, lower rated broadcasters, over-leveraged competitors) will feel a disproportionate share of the pressure. CBS operates in mature businesses that Fitch would still expect to long-term trend with GDP.

CBS continues to have the largest absolute under-funded pension liability in the media and entertainment sector, however, approximately $525 million is related to non-qualified plans that do not need to be pre-funded in accordance with the Pension Protection Act (PPA). Fitch would expect at least a portion of losses in 2008 from its fixed income portfolio to be mark-to-market adjustments, however, even under the assumption that these are real economic losses Fitch believes CBS can meet its PPA obligations over the next seven years with organic cash flows.

While event-risk exists with the National Amusements (NAI) situation, given existing capital markets, Fitch does not believe it is material enough to affect CBS’s ratings, as any forced selling by NAI or seizure of the CBS shares by NAI’s lenders is not likely to result in incremental leverage at CBS.”

RBR/TVBR observation: Some broadcasters with good balance sheets, such as Entercom and Sinclair, have gone so far as to eliminate dividend payments on their common stock to get through this recession. CBS took a less drastic step, but the dividend payment still requires board review every quarter.