It’s not a lack of cash, but rather CEO David Field says Entercom can make better use of it buying back stock and the previous yield, approaching 18% as the stock price fell, failed to attract yield-based investors. So, the 38 cents per share quarterly payout has been cut to 10 cents and the stock price rose yesterday as the dividend issue was resolved.
“Why did we make this move? First and foremost, and I want to be very clear here, we did not make this move because we felt we had to. We are not concerned about our ability to pay the dividend, which represented just about two-thirds of our free cash flow in 2007,” said Field. He noted that Entercom grew its free cash flow by 67% to $11.4 million in Q1. But the “stunning and stratospheric” dividend yield had been a negative for stock trading, since many investors saw it as a red flag that something was wrong with the company. Meanwhile, very few investment funds that target high-yield stocks had been attracted to Entercom. So, the board of directors has cut the dividend to where the annual yield is around 4%.
Analysts asked a few questions to make sure nothing was amiss. Did Entercom’s banks pressure the company to reduce its dividend? CFO Steve Fisher had a one word answer: “No.” So, why 10 cents? Was there a specific yield target? “I think we triangulated to a point that felt right,” said Field.
Turning to the actual financial results, Entercom reported that Q1 revenues were down 4% to $95.4 million, with local stronger than national. The company’s strongest markets were Austin, Buffalo, Madison, Norfolk and Providence. But while revenues were down, cost controls resulted in EBITDA growing 3% to $26.5 million.
National is pacing better in Q2 and the company projects that revenues should be down in the low to mid single digits.
RBR/TVBR observation: We’ve noted in recent months that some broadcasting companies are paying huge dividend yields, but that has still failed to attract investors to the sector. So, while cutting a dividend usually is a negative on Wall Street, it seems that psychologically the Entercom move had the opposite effect.
“The dividend cut will have the effect of boosting EPS in tandem with a lower share count; we are therefore raising our estimates accordingly,” said SMH Capital analyst David Miller, who raised his estimates for Entercom.
At Wachovia, analyst Marci Ryvicker raised her estimates, noting that Entercom’s Q1 performance was a bit better than she had expected. She’s also looking for a political ad boost in the back half of this year. She figures Entercom will get $4-5 million in political spending this year.
“We do not view the dividend cut as related to any balance sheet issues, but rather as a change in management’s view of how best to create shareholder value,” said Bear Stearns analyst Victor Miller in a note to clients. Q1 results were a little better than he’d expected, as was Q2 guidance. He raised his EBITDA estimate and set a target price for $15.50 for the stock by the end of 2008.
