With apologies to Bill Maher, here’s a New Rule for Big Media CEOs when they decide to raise their dividends or announce a major new stock-repurchase initiative. They have to stop insisting that it’s a sign of confidence and strength in cases where they’re just bribing investors to keep them from fleeing.
This thought struck me in the Q4 earnings season that’s wrapping up. Just about every big company that fell even a little short of Wall Street’s expectations had a new plan to return cash to shareholders. The explanations were consistent. After CBS missed analysts’ revenue and earnings targets, CEO Les Moonves said his accelerated $1B share repurchase reflects “the great confidence we have in our businesses.” At Time Warner — which missed revenue forecasts but beat on earnings — CEO Jeff Bewkes said that it was able to authorize an additional $4B share repurchase and an 11% dividend increase because “we’re at an even stronger position today than we were a year ago.” Then there’s Comcast, which just slightly missed revenue and earnings expectations but raised its dividend by 20% and agreed to repurchase $2B of stock, while announcing that it will pay $16.7B for General Electric’s 49% of NBCUniversal. The moves demonstrate “confidence and optimism in the future of all our businesses,” CEO Brian Roberts said.
They’re right in this sense: Most Big Media companies are part of pay TV oligopolies that still have scandalous power to set and raise prices — mostly by requiring people who want to keep up with the national conversation to pay for dozens of channels that they never watch. Execs also had encouraging reports about current concerns. Generally speaking, ad sales picked up in Q4, and TV viewers returned to the major broadcast networks after the dismal opening weeks of the fall primetime season.
But if executives are so bullish about their companies, then why do they consider it such a great thing to give cash to investors to spend elsewhere? Wouldn’t they demonstrate their faith more persuasively if they used the funds to expand — you know, create jobs — or buy assets in complementary or growing fields? It’s not like we’re still in the depths of the recession when media stocks were such a bargain. CBS shares are more expensive than they’ve been since the end of 2005 when it separated from Viacom. Time Warner’s at a five-year high. And Comcast is at its all-time best. If the investment strategy is to buy assets when the price is high, all I can say is, folks, don’t try this at home.
Clearly there are other considerations in the mix. One is that moguls understand investors have lost patience with Big Media companies that try to build empires. People still remember the value-destroying mergers of the last decade which usually created more distractions than synergies. (That may change over time if Disney’s deals with Pixar and Marvel continue to pay off, and Comcast turns NBCUniversal around for a sustained period.) The AOL Time Warner debacle remains a painful reminder of moguls’ hubris, and tin ear when it comes to managing new media.
Most importantly, though, the Street fears that traditional media giants are about to experience the same sickening declines we saw in the music and newspaper industries. Too many people are connecting their TV sets — not to mention smartphones and tablets — to the Internet while powerful and resourceful companies including Apple, Google, Microsoft, Amazon, and Netflix begin to create meaningful alternatives for people who want to be informed and entertained without a pay TV subscription. The question on investors’ minds, then, is: How long do we have before we need to get out — before it becomes apparent to everyone that the current system is unsustainable and the players’ profit margins are about to shrink?
Big Media moguls, who consider stock prices to be their report cards, understandably want to delay the exodus as long as they can. That’s why they’re so sensitive to market expectations, and why returning cash to shareholders makes sense. It reassures people that CEOs won’t make crazy acquisitions. It also makes short term investors more comfortable that moguls will take advantage of their market power to generate big profits now, and pray that their tactics won’t haunt them later. For example, networks will continue to raise their retransmission consent and carriage fees — and even create costly new sports services — despite warnings that rising prices ultimately will drive millions of pay TV customers to cut the cord. And producers will still sell shows to new streaming services such as Netflix even if that eventually begins to cannibalize conventional TV viewing.
CEOs can call their cash strategies a sign of confidence. It looks to me more like expediency. And if they hurt their companies’ long-term prospects? Well, as economist John Maynard Keynes once observed, “in the long run we are all dead.”