Corus Entertainment Inc. (TSX:CJR.B) shares keep falling and its artificially high yield keeps surging to ridiculous new heights. The dividend yield is now at a staggering 19.6%. The company’s self-proclaimed shareholder friendly management team has been doing everything within their power to keep this dividend intact despite the general public already factoring in a massive dividend cut over the next year.
I’m going to throw this out right now: no dividend with a 20% yield is sustainable over the long term.
It is, however, remarkable that Corus has been able to cover its massive dividend through the ample amounts of free cash flow it generates. Over the last year, Corus clocked in $335 million in free cash flow, which covered its hefty $129 million to cover the dividend, putting the FCF payout ratio at just 38.5%.
The FCF payout ratio tells us a different story than the “stretched” 117.5% traditional payout ratio. The former tells investors that the company isn’t feeling the pressure to slash its dividend anytime soon despite its yield surging to a seemingly unsustainable +20%.
With this in mind, is the dividend safe?
Although it appears the dividend is covered over the foreseeable future and management is reluctant to ruin its reputation as a shareholder-friendly team, I think a dividend cut is inevitable over the medium term in spite of decent fundamentals that aren’t as bad as Corus’ stock chart would suggest.
Why?
Corus’ industry is in secular decline, and I believe the cord-cutting trend will continue to accelerate as more video streamers beef up their original content budgets in order to promote subscriber growth. Advertising revenues are likely going to continue to be weak as advertisers opt for higher-quality ads on new age platforms.
Consumers are unlikely to look back, and the only way Corus will be great again is if they adapt to the industry’s changing landscape. Content is king and will always remain so, even if the medium of viewing changes.
While Corus has a remarkable portfolio of great content (mostly catering to women and children), the company needs to take an aggressive step into the realm of content creation by spending on exciting premium content targeted for release on a streaming platform.
Management may have no other choice than to cut its dividend by ~75% or more in order to finance initiatives to steer the ship back in the right direction. The amount of capital expenditures has been dwarfed by the dividend payment; when thinking longer-term, this strategy isn’t good for investors hoping for a rebound.
Shareholders are already expecting drastic moves as we head into 2019, when the dividend yield could grow to +25%. I don’t think anyone would be surprised if the dividend is slashed by this time next year, however. I’m cautiously optimistic on a potential adaptation plan for Corus, and I do think the shareholder-friendly management team will cut the dividend once such that the dividend is still attractive for investors while giving management enough wiggle room to start financing new content creation.
Bottom line
Just because Corus can support its ~20% dividend for longer doesn’t mean it should. The lack of capital expenditures disturbing; instead of “riding out the storm,” management should take a more active role in adapting its business to cater to the digital age of content consumers.
In the year ahead, we’ll learn more of management’s plans. In the meantime, I find it hard to believe that this “wait and see” approach will do anything but damage shareholders as the stock continues its tumble into the abyss.
So, in short, the dividend is theoretically safe for now. But as long as it remains intact, I believe the stock will continue to plunge at a rate such that your total returns will still be in the red. If a cut is introduced and a new plan to adapt is formulated, I think the stock could rally with a reduced dividend, however, I believe this scenario will lead to positive total returns.
Unless you’re an aggressive contrarian deep-value investor, I’d just keep the stock on a watch list for now.
