Analyst Todd Juenger, no fan of Viacom, says the company should cut its dividend if it wants to have the cash to rebuild its ailing TV and film businesses.
With a new board and interim CEO, Viacom faces financial issues with falling cash flow and high debt ratios. Viacom has been criticized for paying dividends and buying back stock instead of investing in the digital businesses that are attracting the company’s young-skewing viewers.
Juenger, who works at Sanford C. Bernstein, says Viacom basically has four choices when it comes to its debt situation. It can do nothing and risk a credit downgrade to below investment grade, it can decrease or suspend its dividend, it can sell a stake in Paramount or merge with CBS and recapitalize.
The Redstones, who reasserted their control of Viacom, ousted former CEO Philippe Dauman partly because they oppose selling Paramount, so that options out, Juenger notes. And a CBS merger is too far off in the horizon.
He sees the “do nothing” option as “a dereliction of fiduciary duty” because Viacom will need access to the credit markets and prefers the reduction in the dividend, which would “demonstrate fiscal responsibility and give [Viacom] flexibility.”
Without cutting the dividend, Juenger projects that it is possible Viacom will be able to pay off some debt, but he says the margin is “razor thin” and could be wiped out if cash flow falls more than he expects.
That would leave the company with no free cash flow to invest in content or digital platforms or make either tuck-in or strategic acquisitions.
Juenger notes that cutting the dividend would probably hurt Viacom’s stock price in the short term.
“The market typically reads the signal like this: ‘If management doesn’t have confidence in their future cash flows, why should we?’” he said in a note Thursday. “But there comes a time when management bravado and an imprudent dividend policy low their power as a positive signaling device and instead become a negative signal (that management is out of touch with reality.)”
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