Have you noticed the performance of the Services sector lately? It’s the second best performer over the past three months, trailing only the Healthcare sector, having gained 4.6%:
We cover a fair amount of Services stocks in our articles, mainly shipping high dividend stocks, but we also cover some hefty payers in other industries. One of these is Corus Entertainment (OTCPK:CJREF), a Canadian diversified broadcasting company, which we started covering in mid-July 2016. Since then, it has risen 7.7%, in addition to yielding over 8%, for a total return of around 16%.
Although its one-year performance lags the S&P, CJREF has done well in 2017, gaining 8.57% year to date, outperforming the S&P 500 in the past month, quarter, and year to date:
We first got involved with CJREF when we were researching monthly dividend-paying stocks. Corus has a long record of monthly payouts, which go back to 2007. (All dollars in this article are in Canadian funds, except where otherwise noted):
Profile: Corus was founded in 1999 by JR Shaw of Shaw Communications (NYSE:SJR). On 4/1/16, Corus acquired Shaw’s portfolio of TV brands in a transformative $2.6B deal. The company divested its Pay-TV assets as part of the deal.
Corus owns 45 specialty television channels and 15 conventional television stations, with premium brands, including Global Television, W Network, OWN: Oprah Winfrey Network Canada, HGTV Canada, Food Network Canada, History®, Showcase, National Geographic, Disney Channel Canada, YTV, and Nickelodeon Canada.
Corus also owns 39 radio stations that represent the most listened to stations in the Canada, located in eight out of the 10 top markets. The company’s portfolio includes a network of leading news-talk radio stations, as well as classic rock, country, new rock, and contemporary music formats.
Corus creates content that is sold in more than 160 countries across the world. (Source: Corus site)
Corus derives 91% of its revenues from its TV and Content segment, with the 9% balance coming from its Radio segment. Advertising delivers 66% of the company’s overall revenue, followed by 30% from subscribers, and 4% from other sources.
It’s a dominant force in Canadian broadcasting – its specialty TV programming attracts more women in large households, (ages 25-54), than any other media company in Canada. It has seven of the top 10 specialty channels among women and kids:
The Shaw deal has seriously pumped up Corus’s revenues, cash flows, and earnings, as it integrated the new assets over the past four quarters. Its fiscal year ends on 8/31/17:
Its trailing four quarter figures are impressive – revenue grew 72%, adjusted net income grew 36%, and free cash flow rose by 59%. It issued shares in conjunction with the Shaw deal, which accounts for the lower EPS figures and the higher amount of total dividends paid:
On 4/1/16, in conjunction with the Shaw Media acquisition, management announced a new organizational structure, which has benefited from the combined power of the company’s radio operations and its conventional television stations to create a stronger presence in local advertising – across radio, TV, and digital. Fiscal 2017 segment profits reflect the continued realization of cost synergies derived from these efforts:
Segment profit increased 34% in Q3 of fiscal 2017 and 54% on a year-to-date basis. Segment profit margin for fiscal Q3 ’17 was 41% vs. 40% in fiscal Q3 ’16, and for the most recent three quarters was 39%, compared to 42%:
Radio’s segment profit also increased – it was up 20% in the third quarter of fiscal 2017 and 13% year to date. In addition, the Radio division’s profit margin increased to 30% in fiscal Q3 ’17, and to 27% for the most recent three quarters vs. 23% in the same period one year ago:
Dividends: Corus has paid a monthly dividend of $.095 CAN, since February 2015. Here’s the breakdown of how the monthly payout translates into US currency – currently, it equals around $.073 USD/share.
Our High Dividend Stocks By Sector Tables track CJREF’s price and current dividend yield (in the Services section).
Like many monthly dividend payers, Corus pre-announces the next quarter’s ex-dividend dates and payout dates. Our clients find this useful for planning their cash flow:
Corus’s dividend payout ratio, based upon IFRS comprehensive income, has been lumpy but hit just below 50% in the past quarter, giving it a trailing 67% ratio.
We also looked at Corus’s payout ratio from the standpoint of free cash flow, which has grown by over 59% in the past four quarters, giving it a lower trailing dividend payout ratio of 50.27%:
Here’s Corus’ Dividend Payout ratio history for the past five years:
Risks: As with most foreign shares, you’ll gain diversification vs. your U.S.-based holdings. The flip side of this is that you’ll have currency risk exposure. Fortunately, the Canadian dollar has gained over 3% vs. the US $ so far in 2017.
-The B shares are non-voting shares, which give shareholders no access to voting rights on company issues. So, it comes down to trusting management, which has performed well so far.
-There are two ways you can buy Corus – either on the Toronto exchange under the ticker CJR.B, or on the U.S. OTC market under the ticker CJREF. The “F” on the end of CJREF’s code indicates that it is a fungible stock, which means investors can either trade it in the U.S. or on its foreign exchange. The Toronto shares’ trade volume was over 184K shares on 6/30/17, and the U.S. OTC shares traded around 3,700 shares.
Since OTC share prices can jump around a lot, your best bet is to get your online broker to figure out if the US OTC ask price relates properly to the Toronto price – there may be about a $.01/share upcharge between the shares. If there isn’t enough US volume to fill an order, some brokers, such as Schwab, fill it on the Toronto exchange.
-Digital vs. Conventional Media – This is the big elephant stalking broadcast media companies. Will the millennials all cut the cord and kill TV advertising revenues? Corus’s CEO, Doug Murphy spoke about this, in terms of the comparative quality of ad views, on this week’s Q3 earnings call:
“A view is not a view. In other words, a view on television is a 30-second spot and it is a quality piece of content which is effective for the viewer. A view as measured on digital is 3, 4, 5, 6 second, maybe longer if you’re lucky but is not nearly as effective at demonstrating product attributes and features and benefits as is on television.”
“There is a lot of concern now that there is not a safe place for brands when they advertise on digital. Clearly that is bad if you’re a marketer, if you inadvertently have your product up against a bad piece of content that is clearly not going to be a good thing for your property. So we are seeing some folks saying, ‘I just don’t trust some of the digital platforms but I trust television and radio’.”
-Shaw’s shares of Corus are currently held in Corus’s DRIP plan, which management said on the earnings call that “it is able to come out of it at early September or so,” when asked about possible impacts on the company’s cash flow for ’18. Management did point out though, that, “when we look at the non-Shaw shares, we’re still sitting north of 30% participation in the DRIP. So that, obviously, from a cash flow perspective, it helps”.
New Developments (Here Comes Yoda!): On June 8, 2017, Corus announced a multi-year licensing agreement with The Walt Disney Studios (NYSE:DIS) for the Canadian broadcast rights to one of the most successful movie franchises of all time – Star Wars.
The agreement with The Walt Disney Studios includes five of the six original classic Star Wars films; the Canadian network premieres of blockbuster films Star Wars: “The Force Awakens” and “Rogue One: A Star Wars Story”, plus the highly-anticipated “Star Wars: The Last Jedi,” slated for theatrical release in December 2017 and the yet-to-be-released standalone Han Solo movie.
On June 13, 2017, the company’s Nelvana subsidiary inked a broadcast deal with Turner International to bring the ZhuZhus cartoon program to viewers across Europe. Nelvana’s long-term broadcast license deal for the show was completed with Turner for Cartoon Network, Boomerang, Boing, and Cartoonito across the U.K., France, and the Nordics.
Analysts: With its outperformance, Corus is now only 1% below analysts’ consensus price target of $13.82.
Debt and Liquidity: Management uses Net Debt/Segment Profit as its leverage metric and is aiming to decrease Net Debt/Segment Profit leverage to 3.5x by the end of fiscal 2017, with a further reduction to 3.0x by the end of fiscal 2018. It has already delivered an annualized $45M in cost savings as of 5/31/17, so it is ahead of schedule of $45-50M in savings by October 2017.
As of May 31, 2017, net debt was $2,037.2M, down from $2,124.7M at 8/31/16. Net Debt/Segment Profit as of 5/31/17 was 3.5x vs. 5.2x on 8/31/16:
(Source: Corus Q3 ’17 report)
As at 5/31/17, the company had available approximately $300.0M under the Revolving Facility, of which $284.8M could be drawn and was in compliance with all loan covenants, with a net cash balance of $78.0M.
Interest expense for the three and nine month periods ended May 31, 2017, was $39.9M and $118.6M, vs. $33.7M and $71.1M, respectively, in the prior year.
The increase is due to higher interest on long-term debt and imputed interest costs. The increase in interest on long-term debt of $4.4M in the quarter and $41.1M year to date is attributable to increased bank debt associated with financing the Shaw Acquisition.
The effective interest rate on bank loans and notes for the three and nine-month periods ended May 31, 2017, was 4.8% and 4.7%, vs. 4.8% and 4.6%, respectively, in the prior year. The higher effective rate for the year to date is attributable to the company’s syndicated senior secured credit facilities established April 1, 2016, in connection with the Shaw acquisition.
Annual Capex expenditures are in the $30-35M range.
Summary: We rate CJREF a long-term buy, based upon its attractive dividend yield, monthly payout convenience, lower than average Price/Book, dominant market position, and management’s focus on deleveraging, which has been successful thus far, since the Shaw acquisition.
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
Disclosure: I am/we are long CJREF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.