Viacom Dividend in Focus Ahead of Board Meeting

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While talk about a possible re-combination with CBS continues, no significant strategic decisions are expected at the day-and-a-half outing.

Viacom’s five new board members will get a chance to get a better feel for and weigh in on the company’s business momentum and strategy at a regularly scheduled board meeting that will take place in New York Wednesday and Thursday.

Observers said the board in its day-and-a-half-long strategy review could make calls on such topics as the company’s dividend, which an increasing number of Wall Street observers has said should be cut, and weigh in on budgeting plans in various divisions.

Viacom, like other companies, doesn't disclose the agendas of board meetings. However, the meeting is understood to be a regularly scheduled work and budget meeting ahead of the Sept. 30 end of the company’s fiscal year, and it is not expected to focus on significant strategic decisions or shifts, as some reports have suggested.

Viacom's stock on Friday dropped 6 percent amid a broader market selloff and Wall Street chatter that there wouldn't be any major strategic shifts announced after the board meeting. Year-to-date, the stock is down 7.5 percent.

Most attention is focused on the company's dividend policy, which the board could change this week, according to observers.

After the ouster of Philippe Dauman, whose official last day as non-executive chairman is this Tuesday, and the appointment of Tom Dooley as interim CEO, the company is focusing on key business issues. It recently hired Morgan Stanley and Lion Tree to help it with a review of its capital structure, according to a source. The focus seems to be on debt and cash flow trends and drawing up possible scenarios for reducing debt, which stood at $12.37 billion as of June 30, with $1.4 billion of that maturing over the next year.

Credit analysts at Moody’s and S&P have said in recent months that they could downgrade their debt ratings on the company, which would increase Viacom’s borrowing costs.

Wall Street has increasingly discussed a possible reduction in the company’s quarterly dividend as many believe a sale of a minority stake in Paramount Pictures, which could bring in billions that could go toward debt reduction and spending on new content, seems unlikely. Such a sale would require unanimous board approval, and controlling shareholder Sumner Redstone and daughter Shari Redstone have been opposed to such a deal.

In May 2015, the company raised its dividend by 7 cents, or more than 20 percent, to 40 cents per share. Moody’s Investors Service analyst Neil Begley said the annual dividend payments amount to approximately $636 million.

Viacom in recent years has declared a quarterly dividend by early or mid August, but it didn't do so last month or so far in September. Some observers haven taken that as a sign of possible change. The company hasn't commented on its dividend.

Street observers say a dividend cut may not be the most popular move with investors but could be implemented quickly, would preserve cash and could help the company avoid debt ratings downgrades, even though Begley said it needs to do more.

"Absent concurrent enhancement of audience ratings performance and advertising sales, a dividend reduction alone would not be sufficient to hold the current rating," he wrote in a recent report. "But it would certainly help preserve liquidity and reduce debt more rapidly as the company continues to align its operations to withstand risks from changes in the traditional media ecosystem." He added: “If Viacom cuts its dividends by 75 percent to roughly $160 million per year, it would have over $1 billion of cumulative excess cash through the end of fiscal [year] 2018.”

Sanford C. Bernstein analyst Todd Juenger in a recent report said a dividend cut would "demonstrate fiscal responsibility and give [Viacom] flexibility." He explained: "The market typically reads the signal like this: ‘If management doesn’t have confidence in their future cash flows, why should we?' But there comes a time when management bravado and an imprudent dividend policy [lose] their power as a positive signaling device and instead become a negative signal (that management is out of touch with reality)."

Viacom has already put on hold its stock buybacks, which help boost companies’ earnings per share. Viacom spent nearly $10 billion on such buybacks between Oct. 2012 and March 2015 before stopping repurchases last year when it announced a reorganization and layoffs that provided annual savings of about $350 million.

This fiscal year, the company has bought back $100 million of its stock, but none since the first quarter. “We don't anticipate any share repurchases through year-end fiscal 2018,” S&P Global Ratings analyst Naveen Sarma wrote in a recent report.

In addition to cutting its dividend, some Wall Street analysts have said Viacom could also reduce its cost structure longer-term by merging networks or closing down weaker-performing channels. And UBS analyst Doug Mitchelson sees room for more layoffs. “We believe Viacom's cost structure still has a lot of fat,” he said in a recent report, without detailing where the savings could come from.

Others, meanwhile, continue to speak out in favor of Viacom and corporate sibling CBS Corp. re-combining.

Begley called that “the optimal solution” for Viacom. “They instantly get a competent new leader,” he explained. The combination would also “provide cash flow and a stronger balance sheet to reduce leverage and stabilize the Viacom credit ratings” and “buy Viacom more time to fix its programming flaws by combining/leveraging CBS and Showtime in negotiations for Viacom networks” with pay TV distributors, he added.

“One of the quickest ways for Viacom to address its operational issues is to merge with CBS,” echoed Drexel Hamilton analyst Tony Wible. “However, CBS does not seem interested in a merger, as it would dilute its focus on strong networks with pricing leverage." He added: “A combination may provide growth opportunities as CBS could renegotiate Viacom fees, restructure or sell some of Viacom's less attractive assets, and scale overhead. CBS would also benefit from owning a studio and from substantial deal accretion.”

Others have called for a partial or outright sale of Paramount and a CBS deal.

“We believe that one of the major stumbling blocks for CBS in a merger would be taking on all of Paramount given both the deterioration of the franchise,” Stifel, Nicolaus analyst Benjamin Mogil wrote in a recent report. “Counter-intuitively, we view a partial sale of Paramount as tipping the balance towards a merger, as such a deal would not only generate capital, which could fund a reboot of the studio, but the addition of a strategic partner would ease concerns about management being spread thin, and the valuation of the partial stake would likely result in management being given a long lead time to turn around Paramount.”

Shari Redstone and Dooley are among the directors expected to attend the board meeting in person. The five new members, added in a settlement between Sumner Redstone's National Amusements and Viacom, are Kenneth Lerer, chairman of BuzzFeed; former Discovery Communications CEO Judith McHale; former Sony top executive Nicole Seligman; Eversource Energy chairman Thomas May; and Avis Budget Group boss Ronald Nelson.

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