Corus Entertainment (Corus Entertainment Stock Quote, Chart TSX:CJR.B) looks to be on a roll but it doesn’t take much digging to see where the rot is, says portfolio manager Bryden Teich, who states that the company’s dividend is likely to get another cut.
TV and radio business Corus had a rough year in 2018, with the stock dropping almost 60 per cent over the period. But CJR has been trending higher in 2019, especially after a well-received second-quarter report. Corus is up more than 16 per cent since last week’s Q2, which featured a consensus beat on its top line, with advertising sales driving revenue up four per cent year-over-year to $384.1 million. The company’s free cash flow came in at $83.9 million for the quarter, but net income fell from $45.7 million a year prior to $11.7 million.
“Corus delivered another strong quarter, with double-digit television advertising revenue growth exceeding our expectations,” said Doug Murphy, President and CEO, in a press release. “Notably, the strength of our free cash flow in the quarter is accelerating our progress towards our leverage targets and supporting the advancement of our strategic priorities as we continue to build for the future.”
But Teich says that under the surface, debt issues along with a teetering entertainment sector are clear red flags for investors.
“We don’t own Corus. The environment for media assets has been very difficult in the last number of years and so Corus has been under a lot of pressure with that,” said Teich, partner and portfolio manager at Avenue Investment Management, to BNN Bloomberg on Thursday. “On the last quarter, they had a little bit more positive numbers and so the stock reacted positively from that.”
“The other problem is that Corus still has a lot of debt and so on an enterprise value basis, if you look at what the market cap is and what the debt is, I think they’re going to have a tough time servicing their debt going forward,” he says.
Corus made waves last summer when it slashed its once-attractive dividend by 79 per cent — the yield currently sits at around the three-per-cent mark. Teich says that there could be more cuts to come.
“If you look at the historical 12-month yield on it, it’s elevated because they have historically paid out a much higher dividend. I think that going forward the dividend is going to be much more difficult to sustain at these kinds of levels,” he says.
“If you wanted to trade this around or trade on a quarter, it’s a name that’s going to be very volatile. But it’s not the kind of investing that we do. In a business that’s being disrupted as much as Corus is, it’s not a company that we’d want to own at these levels,” he says.