ViacomCBS: An Undervalued Dividend Stock

ViacomCBS: An Undervalued Dividend Stock

Media stocks were out of favor for most of 2020. The pandemic caused consumer spending to slow down dramatically for a period of time, which led advertisers to cut their spending, and media companies generally suffered as a result. However, media companies are in recovery, and some could be appealing for investors.

One such stock is ViacomCBS (VIAC), which recently hit a new 52-week high. ViacomCBS is one of the larger media companies in the US and given it pays an above-market dividend yield, it is a favorite among institutions like Glenview Capital Management. In this article, we’ll discuss the company’s business, its avenues for growth, and expected total returns.

Business Overview

ViacomCBS is a global media and entertainment company with a broad and diverse product portfolio. The company operates in four segments: TV Entertainment, Cable Networks, Filmed Entertainment, and Publishing. ViacomCBS’ product portfolio includes news and public affairs programming, sports, entertainment, subscription cable networks, subscription streaming, basic cable networks, feature-length films, international broadcast television content, as well as printed and digital books, among others.

With many media companies focusing on a narrow segment of the market, ViacomCBS is a highly diversified way to gain exposure to the industry. It has scale as well, generating about $26 billion in annual revenue with a current market capitalization of $25 billion.

Growth Prospects

ViacomCBS is now one of the largest media companies in the world and owns content and distribution rights on an enormous portfolio of titles and channels. We see five-year growth at 3%, which we see as being driven by slightly higher revenue, as well as further cost savings from the integration of the two companies.

The company’s Q3 earnings report showed significant weakness in revenue due to lower advertising spending by its customers, but some bright spots as well. Total revenue was off 9% year-over-year for both Q3 and the nine-month period. Operating income was down 7%, but this pace of decline was lower than revenue thanks to margin improvements.

The company’s streaming segment saw domestic subscribers soar to nearly 18 million, which was up 72% year-over-year. Streaming and Digital Video revenue was up 56% as a result of this growth. This helped offset the 6% decline in advertising revenue.

After Q3 results, we expect $4.26 in earnings-per-share for this fiscal year, which would represent a significant decline against the prior year’s $5.01 primarily attributable to lower ad revenue.

Expected Returns

ViacomCBS shares have rallied quite strongly in recent weeks, so the expected total return outlook has deteriorated commensurately with the rising valuation. However, we still expect the company to produce 6% total expected returns from today’s price, even with shares trading at new highs.

The projected return will be achieved with our 3% projected growth rate, the 2.3% current dividend yield, and a 0.8% tailwind from the valuation. ViacomCBS currently trades for 9.6 times this year’s earnings estimates, and our fair value estimate is 10 times earnings. Thus, the recent rally has moved the stock very near our fair value estimate, removing the prior tailwind from the low valuation.

The 6% projected total return is good enough to earn the stock a hold rating, particularly for dividend investors looking to generate income from their investments.

Final Thoughts

Viacom CBS has scale and diversification in the media and entertainment business, and we like its portfolio of traditional and digital assets. In particular, its streaming business is growing by leaps and bounds, which we believe has contributed significantly to the rise in the share price in recent weeks. The stock has a market-beating dividend yield and a positive growth outlook, so we continue to rate it as a quality hold for dividend growth investors.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame

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