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Meredith is in Transition, But 25-year Dividend Growth Streak Continues

Meredith (MDP) is one of the nation's oldest media and publishing companies, having been founded in 1902 as an agricultural publisher. More impressively, the firm has paid uninterrupted dividends for 71 consecutive years and has increased its dividend in each of the last 25 years.

At its core, Meredith provides consumers with the content they want by leveraging print, digital, mobile, video, and broadcast TV media platforms. Advertising is the company's largest source of revenue. 

Meredith organizes its various media businesses into two segments:

  • Local Media (31% of sales, 66% of operating profits): owns 17 local TV stations including: seven CBS affiliates, five FOX affiliates, two MyNetworkTV affiliates, one NBC affiliate, one ABC affiliate, and two independent stations. This segment also includes 12 websites and about 30 applications focused on news, sports, and weather-related information. The local TV stations reach 11% of all U.S. households. 

  • National Media (69% of sales, 34% of operating profits): publishes magazines targeted to women, including well known titles such as: People, Better Homes & Gardens, InStyle, Allrecipes, Real Simple, Shape, Southern Living, and Martha Stewart Living. This segment also runs approximately 60 websites and over a dozen smartphone applications hosting special interest publications. 
Source: Meredith Investor Presentation
Nationally, the firm reaches over 175 million American consumers directly, has more than 120 million magazine readers, paid circulation in excess of 40 million subscribers, and 140 million monthly unique visitors to its websites. Meredith also reaches 80% of all millennial women, and 65% of all Latinas. 

Business Analysis

Despite massive disruption and changes to the media landscape over the last decade, Meredith is a rare success story that has been able to adapt and thrive.

The company has recorded steady high single-digit annual growth in both revenue and EBITDA over the past half-decade. This has allowed Meredith to continue its impressive track record of delivering a quarter century of consecutive annual dividend hikes.
Source: Meredith Annual Report
A key to Meredith's success is the firm's ability to adapt to changing industry conditions. For example, Meredith's strong collection of top national brands has been built up from decades of industry consolidation, including the firm's $3.2 billion acquisition of struggling publication giant Time in January 2018.

That purchase added magazines and brands such as People, InStyle, Real Simple, Southern Living, and Travel + Leisure. Management believes Meredith can extract $550 million in synergistic cost savings from this purchase in just the first two years of operations. 

In other words, when parts of the media industry (e.g. large magazine publishers) struggle to grow, the strongest names are able to acquire the weaker one's best assets and grow even more dominant, as well as achieve superior economies of scale.

However, Meredith isn't just about empire building. The company frequently conducts portfolio reviews of its best and worst performing brands to determine which ones best fit with its long-term, more digital-focused growth strategy.

As a result, management will periodically sell brands, including recent dispositions of Time, Fortune, and Sports Illustrated. Proceeds from those sales will go towards paying down debt and reinvesting in Meredith's omni-channel focus with its remaining core brands.

Meredith's biggest success has been in rapidly embracing an online presence and growing its social media presence, especially with women, who are its primary demographic.

Impressively, Meredith's 60 online websites attract over 140 million unique monthly visitors (10th most visited company in America), and its videos are viewed over 9 billion times per year.
Source: Meredith Investor Presentation
Combined with strong interaction with its visitors (which allows for advanced data collection and analytics), this has helped grow the company's online sales by 27% annually over the past five years.

As a result, in the past half-decade Meredith's advertising business (about 50% of total sales) has seen its reliance on print ads fall from 90% of revenue to 69%.
Source: Meredith Investor Presentation
And digital is hardly the only way Meredith is adapting to the changing media environment. The company is also leveraging its top national properties into multiple revenue streams. This includes not just magazine subscriptions and advertising but licensing its brands across thousands of channels.
Source: Meredith Investor Presentation
As the world’s second largest global licensor, Meredith's direct-to-retail partnerships with Walmart, Bed Bath & Beyond, TJ Maxx, and other companies help continue growing its audience while also providing a source of high-margin revenue. 

By maintaining a forward-looking culture, Meredith has thus far done a nice job managing its business in an increasingly digital media world. While print magazine subscriptions and advertising are still important contributors to the firm's total profits, Meredith's digital channels are expanding quickly as they leverage well-known brands. 

And given the sheer size of the print magazine business (Meredith is the largest magazine publisher in America), this division should remain a cash cow for years to come, even with continued moderate declines in newsstand sales. While a magazine's costs are largely fixed, Meredith runs all of its back-office activities in Des Moines, IA, which also helps keep its cost profile relatively low.

The company's local media (TV) business, which makes up about two thirds of Meredith's operating profit in fiscal 2017, provides a nice source of non-print cash flow diversification. Management has taken a disciplined approach here, too.

Rather than competing in large, costly, and crowded markets (like New York, LA and Chicago), Meredith has decided to focus on dominating smaller but faster-growing markets such as Phoenix, Atlanta, Las Vegas, and Portland. Today Meredith has No. 1 or No. 2 market share positions in 10 of its 17 TV markets, including duopoly status in five of them.
Source: Meredith Investor Presentation
There are two reasons why the company's targeted local TV focus appears to be a good one. First, it allows Meredith to leverage its online presence, including via highly popular local TV apps. This allows the firm to gather user data which can be analyzed to provide better targeted online advertising (over 1 billion digital ad impressions each year). 

And in traditional TV advertising, Meredith benefits from over 50 years of experience in selling ads and has a sales team working to keep revenue flowing from leading advertising customers such as Ikea, Honda, Capital One, and Airbnb.

Second, by commanding higher market share in core local TV markets, Meredith has been able to achieve impressive growth in political advertising revenue (8% annual increases on average since 2011). 

In 2017, Meredith sold $63 million in political ads which made up about 4% and 8% of its total company sales and advertising revenue, respectively. In 2018, the company expects over $65 million in political ads, thanks to the highly politicized and competitive nature of this year's midterm races. 

In total, Meredith believes that its strong focus on core local TV markets, strong national magazine brands, cross selling products (multiple revenue streams), and cost-cutting synergies from the Time acquisition will be able to drive EBITDA growth of nearly 200% between 2017 and fiscal 2020.
Source: Meredith Investor Presentation
The company also plans to dedicate extra cash flow to repaying $1 billion in debt (which was taken on to buy Time) by fiscal 2019. By 2020 the company wants to lower its net debt to EBITDA (leverage) ratio from 3.5 to 1.9, bringing it inline with the industry average.
Source: Meredith Investor Presentation
Management's deleveraging plan will ensure continued financial flexibility in the future, including an ability to continue consolidating struggling rivals. Quickly returning to a lower debt level will also allow Meredith to continue its impressive dividend growth track record while increasing the safety of its payout.

Over the long term, management's policy is to invest 50% of operating cash flow into growing the business and returning the other half to shareholders via dividends first and buybacks with the cash that is left over.

Overall, as far as media companies go, few have proven to be as focused, adaptable, and shareholder-friendly as Meredith. That being said, there are some important risks to be aware of.

Key Risks

While Meredith's dividend track record is indeed impressive, it's important to point out that dividend growth has been slowing over time: 

  • 20-year average growth rate: 11%
  • 5-year average growth rate: 8%
  • 2018's dividend growth rate: 5%

There are important risk factors to consider that might result in several more years of slower-than-usual payout increases that dividend investors need to consider. 

First, the Time acquisition added a massive amount of debt to Meredith's balance sheet. In fact, the company's leverage ratio tripled, which is why today Meredith has a B+ credit rating from S&P. That's firmly in "junk bond" territory, indicating that the company is more exposed to rising long-term interest rates which could increase refinancing costs in the future. 

While management has said that deleveraging quickly is a top priority, that largely depends on the synergistic cost savings from Time going as planned. If the integration of Time, which will be a complex, multi-year affair, doesn't go well, then the company will miss its ambitious EBITDA growth and deleveraging targets.

The bulk of cost savings are concentrated in cutting down on duplicate overhead expenses and vendor contracts, which seem like lower-risk initiatives, but there's also a chunk of expected synergies tied to less certain activities such as bundling to achieve promotion efficiencies. Of course, the success of the deal also hinges on the future growth trajectory of magazine subscriptions.
Source: Meredith Investor Presentation
If Meredith's deleveraging process takes longer than expected, that could translate into further slowing of its dividend growth. Since the large merger integration costs are expected to, at least temporarily, reduce the company's free cash flow per share, some degree of dividend growth deceleration seems likely. 

While the acquisition of Time is meant to gradually make Meredith's business less dependent on cyclical advertising revenue and more focused on high-margin consumer subscriptions, the firm's largest source of sales is still advertising. 

As a result, Meredith's sales and free cash flow rise and fall with the health of the U.S. economy. While this isn't a risk to the company's long-term earning power, a recession that occurs in the next few years could strain Meredith's business given its debt load and need to grow its cash flow. While that's unlikely to threaten the dividend, the stock could be more volatile than usual. 

Looking further out, Meredith faces challenges with some of its core businesses, such as local TV stations. Specifically, about 20% of revenue comes from retransmission fees from its 17 stations. Meredith receives these fees from cable, satellite, and over-the-top service providers that carry its TV programming in its markets.

Through fiscal 2020, approximately 90% of its retransmission fee contracts will be up for renewal. Historically, retransmission prices have gone up steadily at a decent clip. However, in recent years the growth rate of these fees has been slowing as local TV has faced pressure from cord cutting. 

The rise of an ever-larger number of streaming services, such as Netflix, Amazon Prime Video, Hulu, and soon Disney's offering (launching late 2019) and AT&T's Time Warner-powered service (also late 2019) will only further increase competitive pressures for local TV stations. 

As this plays out, lucrative retransmission fees could actually decline in the future, which could permanently slow the company's overall growth rate if the rest of the business isn't firing on all cylinders. 

Finally, the changing nature of advertising itself will always represent perhaps the biggest long-term risk to Meredith. Back in the 1950s magazine advertising reigned supreme, due to extremely high subscriber penetration and a lack of a more targeted method of competition. 

Thus full page ads could fetch top dollar and magazine publishers like Meredith could rely on strong and steady growth in its top and bottom lines. 

However, today online advertising is the fastest-growing part of the industry, with analyst firm eMarketer forecasting that by 2020 over 50% of all advertising budgets will go to digital. That trend seems unlikely to end anytime soon.

As a result, you can see that Meredith's top magazines are experiencing meaningful declines in advertising revenue. Note that People and InStyle were part of the Time acquisition which is why their growth rate shows up as 100%.
Source: Meredith Annual Report

Fortunately there is much more to Meredith's business than print magazines, and the company's digital sales have been growing more than 20% per year over the last five years. 

While such strong digital sales are a good indication that Meredith is adapting, keep in mind that online advertising is one of the most competitive industries on earth. Today the industry is dominated by Facebook and Google:
The point is that online advertising is a cutthroat business where costs per click have been under pressure due to massive competition from Google, Facebook, and now Amazon. These tech behemoths have massive user bases and hordes of unique data they can leverage to help advertisers target the right customer at the right time.

As the quality of targeted advertising continues increasing at these companies, the online ad market seems likely to become ever more competitive. While Meredith may be one of the biggest names in magazine publishing and traditional media, it is still dwarfed by these three mega rivals, who have billions of dollars to devote to improving their targeted ad businesses. 

Thus the risk is that Meredith's online ad sales growth could eventually slow to levels that don't more than offset its flat and possibly soon-to-be declining print media business. That, in turn, would translate into slower long-term cash flow and dividend growth, making Meredith a less attractive dividend growth investment. 

Conclusion

Meredith has long been one of the best-run and most adaptable traditional media companies in America. Decades of acquiring and launching premium-branded magazines, plus dominant market share in its core TV stations, have served investors well, resulting in 25 consecutive years of dividend growth. 

Meredith's long-term strategy of further consolidating the traditional media industry by acquiring Time, combined with an increased focus on digital media interaction and targeted online advertising, appears reasonable. Management is confident the company will continue to see strong cash flow and dividend growth in the years to come. 

But while the firm's generous dividend may seem appealing to those looking to live off dividends in retirement, keep in mind that the media industry continues to change at an accelerating pace. 

Meredith will be burdened with high debt levels for the next few years and could face integration challenges with Time. That likely means slow dividend growth and higher than usual execution risk over the next year or two. And in the long term, Meredith will likely face ever greater competition from giant and well-capitalized rivals in online ad sales, including Google, Facebook, and Amazon. 

While the company has plenty of opportunities to continue creating shareholder value for years to come, conservative investors may want to give management more time to extract synergies from the Time acquisition, deleverage the balance sheet to a more comfortable level, and continue demonstrating that Meredith can profitably grow its digital media assets to more than offset the headwinds pressuring traditional print magazines.

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