Are you a Corus Entertainment Inc. (TSX:CJR.B) shareholder? I feel for you. The company has been in a downward spiral for years. Corus has not posted positive share growth since 2014, and regardless when you bought over the past 20 years, you’d be in the red.
Its two-year return is negative 50%, and its performance year to date is not much better as its share price has lost 44%. Ouch.
Investors who are holding on are doing so for one reason: the dividend. Thanks to its rapid decline, the company now yields a whopping 17.7%! This type of yield is unheard of. It is also not sustainable.
I have no doubt that a dividend cut is imminent. When that happens, what then?
A positive event
Believe it or not, a dividend cut is actually a good thing. Paying out a 17.7% dividend is bad financial policy. At the moment, Corus’s payout ratio is 110% of earnings.
Bulls will point to the company’s strong cash flow. In 2017, the company’s dividends accounted for 93% of free cash flow. True, it’s enough to cover dividends, but it’s still very high.
The problem with these high payout ratios is that the company is not re-investing in its operations. Corus operates in a very competitive industry that requires high levels of capital expenditures. The company needs to start investing earnings back in the company.
Without this re-investment, the company will continue to struggle.
There are plenty of examples where a dividend cut was viewed as a positive by the markets. This is especially true for companies with high levels of debt. Corus is highly indebted and has a debt-to-equity ratio of 77.45. Need I say more?
No other option
To improve its debt position, Corus has attempted to sell non-core assets. That’s easier said than done.
The company had a deal to sell two of its French-language specialty channels to Bell for $200 million. Unfortunately, the federal watchdog stepped in and blocked the deal on competition concerns.
A dividend cut is the company’s only option at the moment. The question then becomes, how much will it need to be cut? Expect a significant cut.
Barclays analyst Philip Huang expects Corus to slash its dividend in half. “Given our expectation of continued soft ad revenues and low visibility, we believe a dividend cut of greater than 50% would be prudent.”
It could be more. If Corus were to cut its dividend in half, it would still have a yield of approximately 9% based on today’s share price. That is still too high. A more reasonable yield to aim for would be approximately 5%. To get there, the company would need to cut dividends by approximately 70%.
Stay on the sidelines
Once Corus cuts its dividend, it can pay down debt and re-invest in the company. Until the company can reduce its debt and return to growth, investors should stay on the sidelines.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Mat Litalien has no position in any of the companies listed.