Meredith Corporation (MDP) is a company that most people may not have heard about it. But it is a long-time dividend growth stock. In fact, Meredith is a Dividend Champion having raised the dividend for 27 consecutive years before the dividend suspension. Meredith is a media company. It owns many leading lifestyle, entertainment, food, and parenting magazines. It also owns television stations. The recent difficulty for Meredith is that COVID-19 has severely reduced the demand for advertising in both print and television. One only has to look at news headlines to realize that this is true. Even mighty Google (GOOG) and Facebook (FB) have been suffering from a reduced add spending. The reduction is probably steeper in print media and television than digital media. In the end Meredith probably needed to announce the dividend suspension to preserve liquidity.
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Overview of Meredith
Meredith traces its founding back to 1902 in Des Moines, Iowa. Today, Meredith is a diversified media company. The company is focused on both print media through its many magazines and also local television studios. Meredith is the No. 1 magazine publisher in the U.S. and has over one-third share of U.S. print advertising revenue. Operations are split into two operating segments: National Media Group and Local Media Group. The National Media Group owns major brands including People, Better Homes & Gardens, InStyle, Allrecipes, REAL SIMPLE, SHAPE, Southern Living, Entertainment Weekly, Food & Wine, and Martha Stewart Living. This segment also licenses brands. The Local Media Group owns 17 television studios that reach about 11 percent of U.S. households. Meredith acquired Time Inc for $2.8 billion in 2018. It now in the process of divesting brands that do not fit its portfolio. Sales include Money, Sports Illustrated, FORTUNE, and TIME.
Meredith Dividend Suspension
Meredith announced the dividend suspension on April 20, 2020. This was still relatively early in the COVID-19 pandemic in the U.S. The company also withdrew guidance at the same time. This suggested that the impact of COVID-19 on advertising revenue was fairly severe and rapid.
Meredith had paid a dividend for 73 consecutive years. The dividend was raised for 27 straight years making the company a Dividend Champion. The dividend growth rate has been volatile., in some years, e.g. 2011 – 2012, the rate was in the double-digits. More recently, the dividend growth rate was about 5%. This is not high, but it was consistent.
The specific statements from the company CEO Tom Harty were:
At the same time, the COVID-19 crisis has created an extremely challenging business environment, including significant advertising campaign cancellations and delays,…While our financial position is strong, given the impact on advertising – which represents approximately half of our revenue mix – we are proactively taking aggressive actions to strengthen our liquidity and enhance our financial flexibility in the near-term to effectively navigate the current environment.
In addition, the press release stated:
The Meredith Board of Directors has also unanimously voted to pause Meredith’s common stock dividend. The Board remains committed to paying a dividend over the longer-term and would seek to resume Meredith’s dividend policy when advertising market conditions improve.
Impact of COVID-19 on Advertising
COVID-19 is having a large impact on companies that rely on advertising revenue. The disease has seemingly left a trail of destruction on the travel and hospitality industry as well as the leisure industry. One does not have to spend too much time looking through news articles to realize that airlines have canceled flights, hotels have closed, movie theaters are shutdown, sporting events are canceled, etc.
Many companies have pulled fiscal 2020 guidance. These companies are for the most part expecting much lower revenue in 2020, particularly in Q2 2020 and Q3 2020. Companies that reduce revenue expectations will also adjust the cost side to enhance liquidity and strengthen the balance sheet. In addition to other actions they will likely cut advertising spending. In fact, fully 69% of companies in a recent survey are expecting to decrease advertising spending in 2020. This is not a small number and it could increase through the year depending on the impact of COVID-19.
The chart below shows that a large percentage of companies have conducted a variety of actions in March 2020 and April 2020 to reduce advertising spending. Some companies have stopped campaigns. Other companies have delayed campaign launches. Some companies completely canceled a campaign before it launched. Yet other companies paused existing campaigns or changed the media type. The number of companies that did not change their advertising activity or spending was few at only 11% of surveyed companies.
The total impact is not small on companies that rely on advertising revenue. For instance, it has been estimated that Google will face a 18% decline in revenue or $28.6 billion and Facebook will have a 19% decrease in revenue or $15.7 billion. Most of this will be ad revenue.
Meredith’s Revenue is Declining
What about Meredith’s revenue? Well, in Q3 FY 2020 revenue was down (6%) and revenue fell (7%) for the first nine months. The company indicated that COVID-19 led to a $17 million reduction due to cancellation and delays. The company also had an operating loss of ($289) million due to impairments of goodwill and intangible assets. The company indicated that COVID-19 started to impact advertising revenue in mid-March. Since the quarter went through March 2020, it is likely that Q4 FY 2020 will have a greater revenue decline than the third quarter. Recall it was really only in mid-March that COVID-19 restrictions and shutdowns took hold across the U.S.
Final Thoughts on Meredith Dividend Suspension
Meredith will likely have a long road back. It is unlikely that advertising budgets will quickly be restored to levels before the COVID-19 pandemic. The unemployment rate is just too high at the moment and the U.S. economy is contracting. Further, Meredith has a leveraged balance sheet. Granted, the company has paid down some debt with cash from the sales of non-core Time Inc assets. But total debt is roughly $2,853 million at end of Q3 FY 2020. This is offset by only about $103 million in cash. The leverage ratio was 4.2X and interest coverage was about 4X at end of the quarter. A leverage ratio under 2.5X is generally undesirable.
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In my opinion it is unlikely that the dividend will be fully restored in the near future due to the combination of lower advertising revenue and leverage. I expect that the dividend will be at a lower level than before the COVID-19 pandemic when it is restarted.
Thanks for reading Meredith Corporation (MDP) Dividend Suspension!
You can also read Urstadt Biddle Properties (UDP) Dividend Cut.
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