>Because some of you still(?) read the NY Times….
By Sarah Rabil
Aug. 12 (Bloomberg) — New York Times Co. faces increased financial pressure to cut its dividend as credit quality deteriorates amid record advertising declines.
Bondholders are paying for the Sulzberger family’s decision last year to raise the quarterly dividend 31 percent to 23 cents a share. The extra yield investors demand to own New York Times bonds instead of U.S. Treasuries has more than doubled in 2008. The cost to protect the debt against default has climbed 27 basis points since the newspaper publisher posted earnings July 23, meaning investors are betting that credit quality will weaken further.
Moody’s Investors Service says one way for New York Times to save its rating, a step above junk and in danger of being cut, would be to reduce the dividend costing $132 million a year.
“They’d have potentially more cash available to fund investments and debt reduction,” Moody’s analyst John Puchalla in New York said in an interview. “Depending on how they use that cash that’s freed up, that could be beneficial to the rating.”
Shareholders also are losing out with a 39 percent drop in the stock since March 2007, when the New York-based company’s controlling Ochs-Sulzberger family raised the dividend the most in a decade to appease investors. The payout, coupled with an accelerated 16 percent drop in June ad sales, has contributed to higher borrowing costs while failing to support the stock. The Class A shares rose 6 cents to $14.15 at 6.33 a.m. in New York Stock Exchange composite trading.
Like Junk
Credit-default swaps used to speculate on New York Times’ creditworthiness or to hedge against losses are trading as if the company already was rated junk, according to data from Moody’s credit strategy group.
The contracts, costing $397,000 a year to protect $10 million in debt for five years, trade as if the company had a Ba3 rating from Moody’s, three levels below its actual Baa3 rating, the data show. Moody’s on July 29 changed its credit- rating outlook to negative on concern the advertising slump will worsen.
Standard & Poor’s BBB- rating, on watch for a downgrade, already reflects the dividend’s cost, analyst Emile Courtney said in an interview. Faster print-ad declines in the industry’s worst slump on record could trigger a junk rating, the New York- based analyst said.
A rating cut to junk may increase the spread, or extra yield, on 5 percent New York Times bonds maturing in 2015 by at least 73 basis points to 551 basis points, according to the Merrill Lynch BB Bond Index. That indicates the bond’s price may fall 3.1 cents on the dollar to 80.3 cents.
Those bonds have fallen to 83.4 cents on the dollar from 94.2 cents in late 2007, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The spread more than doubled to 478 basis points. The bondholders are primarily insurance companies, including State Farm Life Insurance Co. Bank lenders include Bank of America Corp. and JPMorgan Chase & Co.
Rivals Retreat
Competitors are abandoning the strategy of using the dividend to retain investors, said Ken Doctor, an analyst at Outsell Inc. in Burlingame, California.
In the past month, Miami Herald publisher McClatchy Co. put its dividend policy on review; GateHouse Media Inc., publisher of 97 dailies, suspended its payout; E.W. Scripps Co. declared a smaller dividend than it forecast before splitting off cable-TV channels; and Gannett Co., owner of USA Today, skipped its annual increase for the second time in 41 years.
Each saw a drop in newspaper advertising in the second quarter, following the industry’s 14 percent skid in the first.
New York Times’ dividend yields 6.5 percent, second-highest after Gannett among media companies in the S&P 500 Index, according to data compiled by Bloomberg. The family’s 19 percent equity stake, according to filings, entitles members to about $25.1 million in payments this year. A family trust holds 89 percent of Class B shares that elect 70 percent of board members.
Newsroom Cuts
The family has historically sought to preserve New York Times’ access to cash and has limited its borrowing, said Fitch Ratings media analyst Mike Simonton in Chicago, who doesn’t rate the debt. “It’s possible that their risk-tolerance has increased,” which would lessen the chances of a dividend cut.
New York Times spokeswoman Catherine Mathis said the company and Chairman Arthur O. Sulzberger Jr. declined to comment. The company balances shareholder value with borrowing costs and expects to keep its investment-grade rating, Chief Financial Officer James Follo said on a July 23 conference call.
Chief Executive Officer Janet Robinson has accelerated cost cuts and projects annual savings will surpass a target of $230 million by the end of 2009. In May, the New York Times said it eliminated 100 newsroom jobs.
Reducing debt, stabilizing revenue and an improving advertising market could also help the company maintain its credit rating, Moody’s Puchalla said.
Cash Flow
The dividend this year will exceed New York Times’ cash flow from operations minus capital expenses, Goldman Sachs Group Inc. analyst Peter Appert estimates. Next year it will eat up about 75 percent of estimated free cash flow as capital spending is reduced, he said.
“That’s probably too high,” said Appert, in San Francisco, who recommends selling the stock. “It doesn’t give them an awful lot of flexibility in terms of preserving cash for other uses.”
Chairman Sulzberger fended off shareholders last year who challenged the family’s voting control. The company’s largest investor is now Harbinger Capital Partners. The New York-based hedge fund placed two nominees on the board this year and raised its stake to almost 20 percent as of Aug. 1. Tripp Kyle, an outside spokesman for Harbinger, said the firm declined to comment.
The need to refinance a $400 million credit agreement, part of the company’s $1.1 billion in total debt, by May 2009 may force cash-freeing moves.
A downgrade “makes it potentially hard to refinance,” said Barclays Capital analyst Hale Holden in New York, who recommends a short credit position. “That’s complicated if you’re burning cash by paying the dividend.”
To contact the reporter on this story: Sarah Rabil in New York at srabil@bloomberg.net
Last Updated: August 12, 2008 09:38 EDT