Paramount Global (PARA) cut its dividend because of costs to grow the streaming services, lack of profitability, high leverage, and difficulty selling non-core assets.
A challenging business environment and competition have made reaching a profitable scale challenging in streaming services. The company needs to conserve free cash flow when combined with high leverage and rising interest rates. Consequently, the dividend was cut, and investors sold this dividend stock, and the stock price plunged about 28% after the quarterly earnings announcement.
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Overview of Paramount Global (PARA)
Paramount Global (PARA) is a global media and entertainment company. It traces its history to 1914. After the merger of Viacom and CBS in 2019 reversed the 2005 split, the Paramount Pictures brand operated as a business of ViacomCBS. The firm changed its name in February 2022. Paramount Global is a subsidiary of National Amusements, the firm controlled by Shari Redstone.
The company includes brands like Paramount, Nickelodeon, Awesomeness, Miramax, CBS, MTV, Showtime, Comedy Central, BET, CMT, and more. The media giant operates through three business segments: TV Media, Direct-to-Consumer, and Filmed Entertainment. CBS has been the No. 1 TV broadcaster for 15 years in a row. Paramount+, the streaming business, is growing quickly and has 60+ million subscribers, while Pluto TV has 80 million active users.
Total revenue was $30,154 million in 2022 and $30,091 million in the past twelve months.
Dividend Cut Announcement
Paramount Global cut its dividend by 79.2% on May 9, 2023. The company’s quarterly dividend was $0.24 per share before the announcement. After, the dividend was reduced to $0.05 per share. In the statement, the press release said,
“Paramount Global today announced that its Board of Directors has declared a quarterly cash dividend of $0.05 per share on both its Class A and Class B Common Stock. The dividend will be payable on July 3, 2023, to stockholders of record at the close of business on June 15, 2023.”
Although the media firm did not provide a reason for the dividend cut in the announcement, the CFO addressed the matter in the Q1 2023 earnings conference call. He said,
“With respect to capital returns, we will be reducing Paramount’s quarterly dividend on common shares to $0.05 or $0.20 annually. This change provides additional financial flexibility and enhances long-term value creation while continuing to return capital to shareholders. The dividend modification will be effective as of our next payment and will result in approximately $500 million of annualized cash savings. We believe this combination of actions across organic investment and expense reduction, non-core asset sales and dividend policy reflect a prudent capital allocation strategy in an era which presents both macro uncertainty and tremendous growth opportunity.”
In addition, the CEO stated,
“Finally, we are amending our dividend policy. This decision will further enhance our ability to deliver long-term value for our shareholders as we move towards streaming profitability.”
So, clearly, the issue is the streaming businesses are growing but losing money. The dividend cut will allow $500 million of free cash flow to be invested in the streaming business.
Challenges
Paramount Global faces challenges like streaming losses, high debt and leverage, and difficulty selling non-core assets.
Streaming is Not Profitable
The future of media is obviously streaming. Consumers favor the direct-to-consumer (DTC) platform, often free of ads. However, the streaming business is beset by many competitors, like industry leader Netflix (NFLX), Disney+, Amazon Prime Video, Hulu, YouTube TV, Peacock, Apple tv, Sling TV, etc. Many of these businesses are probably unprofitable because of competition.
Paramount Global’s DTC business is no exception. Users grew by millions, viewing hours climbed by a double-digit rate, and revenue rise at a 39% rate in the first quarter. But producing content is expensive, and operating income losses rose too.
To lower operating costs, the firm combined Paramount Global and Showtime+.
The CEO indicated that 2023 will be the peak losses for streaming as the media company attempts to improve FCF and halt streaming losses by the end of 2024. Additionally, the firm is losing traditional TV and cable customers as they move to streaming services.
High Debt and Leverage
Paramount Global’s balance sheet is very leveraged. Total debt at the end of the first quarter of 2023 was $17,251 million, offset by only $2,109 million in cash. Debt exceeds market capitalization by several billion. The firm’s leverage ratio has soared to nearly 7X. Although the media firm is not taking on more debt, which peaked at almost $22 billion in 2020, EBITDA is down. One troubling aspect is interest coverage has fallen to ~2.7X because of rising interest rates.
S&P Global lowered the long-term issuer credit rating to BBB-. They stated,
“Even as the company has outpaced its initial subscriber growth targets for Paramount+, its operating losses have accelerated because of increased content investments, a weaker advertising market, and costs to enter new markets.”
In addition, they said,
“The company’s losses in its DTC segment increased by more than 80 percent in 2022 to $1.8 billion and we estimate they will peak at over $2.0 billion in 2023 before improving to about $1.4 billion in 2024.”
Moreover, Fitch rates Paramount Global a BBB, while Moody’s gives a Baa3. These ratings are lower-medium investment grade.
Difficulty Selling Non-Core Assets
Paramount Global is seeking to sell non-core assets. It desires to sell publishing company, Simon & Schuster. A U.S. judge blocked the earlier deal with Penguin Random House because it would reduce competition. The process to sell the book publisher was restarted.
Additionally, the media company desires to divest the majority of BET Media Group with brands like BET, BET+, and VH1.
Dividend Safety
Paramount Global receives a dividend quality grade of ‘D’ because of decreasing earnings and the dividend cut. The company is still paying a lower dividend, but a second cut may occur if the streaming services do not break even by 2024.
After the reduction, the forward payout ratio is roughly 30% based on an annual dividend rate of $0.20 and consensus earnings of $0.66 per share. This percentage is lower than our target value of 65% or less.
The annual dividend now requires about $130.4 million ($0.20 yearly dividend x 652 million shares) compared to $631 million in 2022. However, FCF will be lower in 2023 and maybe negative because of the costs of building the streaming services.
As discussed above, the balance sheet is laden with debt. But the sale of non-core assets and the lower dividend rate should help improve it.
Final Thoughts on the Paramount Global (PARA) Dividend Cut
Paramount Global is growing its streaming business but has too much leverage. As a result, Paramount Global cut the dividend because of free cash flow, and the balance sheet did not support maintaining it.
Despite the dividend cut and the lower dividend yield, investors’ sentiment around the stock is relatively positive because of the magnitude of the pullback. Moreover, the streaming service is growing rapidly.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.