2023-03-18 04:43:31 ET
Summary
- TSQ announced a new dividend policy which will pay shareholders $0.1875 per share quarterly dividend, or $0.75 per share annually.
- TSQ has not paid a dividend for roughly 2 years, so this 9%+ dividend should attract new investors.
- Management also sees potential for the shares to roughly double.
Townsquare Media (TSQ) reported Q4 and FY results for 2022 on March 9th and we have to admit that it caused us to give a little fist pump as we read the press release. The quarterly results were pretty strong, and the full year results were solid - something that was expected as we already had three quarters of that data. While the company continues to morph into a new media company focused on digital, it also continues to build upon its successes quarter after quarter. Most importantly however is that the Board of Directors and the management team are paying attention to investors and doing everything in their power to generate positive shareholder returns.
We last wrote about Townsquare Media on February 9th and discussed how important earnings season was going to be - and that investors should look to both iHeartMedia ( IHRT ) and Cumulus Media ( CMLS ) for some guidance on the ad market. We also highlighted the deleveraging story as well as pointed out that investors should pay close attention to management's comments on the conference call surrounding investments around their growth initiatives. We also discussed a dividend once again, something we have felt confident that this company could afford to do for some time.
How About That Dividend?
We have always believed that Townsquare could afford to pay a dividend, and that it was not a matter of if, but when. The company previously paid a dividend that came out to $0.30/share annually. That was cut during 2020 as everyone dealt with COVID. We have pointed out ways that the company could reinstate a dividend of some sort, but we always believed that the dividend policy would require the company to build back up to the $0.075/share quarterly rate ($0.30/share annually). Apparently we were thinking too small because the company's Board approved a quarterly dividend of $0.1875/share which will come out to $0.75/share annually.
At the time of the announcement this dividend policy had a yield of 10%. Today, the yield is closer to 9% after the big rally the stock has had. While this yield will cause many to ignore the stock when it shows up on dividend screeners (as they falsely believe it is likely to be cut in this environment without doing any real research) we think that this could very well be an alpha generator within one's portfolio. See, with the company just implementing this dividend it has a runway even in an economy which is seeing ad sales softening. The decision has been made to focus on boosting shareholder returns via this mechanism, and the Board has allocated about $13 million per year to dividends in order to provide yield support to the share price, but to also highlight the strong cash flows that the underlying businesses are able to generate. In short, the money is there on a cash generation standpoint, as well as quite literally sitting on the balance sheet.
Townsquare Wants To Reward Shareholders
The following is a quote from the company's CEO, Bill Wilson, when answering a question during the conference call from an analyst regarding the dividend:
So, we've obviously evaluated delevering, which we've done quite well. We've evaluated stock buybacks, which we have an authorization of a $50 million buyback that's still active, yet neither one of those things have actually positively influenced our stock price. So given our stock, our shareholders have not yet been rewarded, we felt the most appropriate thing to do right now was a dividend. We have strong cash flow. And it allows us - as Stu said, it's only roughly about $13 million a year. And it allows us to continue to do everything we want to do from a digital investment standpoint. It allows us now to reward our current shareholders and, hopefully future shareholders when they evaluate what a strong cash flow, high yielding dividend, and digital company is doing. And it also allows us, as Stu said, to opportunistically continue to delever and buy bonds in the open market.
This was his summary after a long answer to the analyst in which he spoke about the company utilizing cash flows to pay down debt and get to their lowest leverage ratio ever, investing in the digital initiatives which has now become the majority of the business and repurchasing around 12.6 million shares (which were slightly above the price of the stock before this recent rally). After doing all of those things to improve shareholder returns, the actual stock price was roughly the same and there were about 40% fewer shares outstanding...so investors were actually worse off.
The last thing for the company to do was actually put cold, hard cash into the hands of shareholders, and that has proven, thus far, to be just what the market wanted. The shares have rallied sharply after the announcement and compared to peers the shares have been less volatile on a daily basis (sure the sample size is small, but we have had some really volatile trading days in the last two weeks). While the yield is currently 9%+ it seems like shareholders might have already bought into the idea that this dividend yield might normalize out to a 5% yield, which would put the shares back around $15/share.
How Do The Shares Move Higher?
So we will go more in-depth into this in a later article, and point out that we did discuss valuations back on July 14, 2022 when we wrote about how the stock could double if they succeeded at a list of items and stated our initial price target was $11/share based off of what the company was currently working on. The stock was just over $8/share then, and is essentially flat since publication.
We see numerous ways that the shares can move higher, and now that the company is paying a dividend, the path to $15/share becomes much easier in our opinion. The new capital allocation path has roughly $13 million per year allocated to dividends, and while that money will not help build the business or deleverage it, it provides downward protection so long as the dividend is safe (which we most certainly believe it is). So now that the stock has stabilization, management should be able to sell the story of how they are not a terrestrial radio company anymore, but a digital media company that happens to have terrestrial radio exposure. With a fast growing digital media business, and two segments that should carry higher multiples, it is logical to think that we could see the share price rise simply due to multiple expansion on the P/E or P/S ratios.
Management has already told us that 2023 is going to be a year where they should still see growth in digital, but that the expansion with the Phoenix office (which opened in March) will not start to show up in the numbers really until 2024. So while digital will grow 10% in 2023, margins will probably come down a bit and lag as everything ramps up out West. However, the market will have to start paying attention to the Townsquare as something other than a radio company if they have no M&A activity over the next 12-24 months and continue to see digital growing at 10-15% over that time frame. Once digital accounts for 60-75% of revenues, we do think that the market has to reward that based off of numbers alone. The company certainly will not be granted a full-on tech company valuation, but it could very well trade for a P/E around 10x or a P/S of 0.6x looking at their current revenue mix.
Our Final Thoughts
We thought that this was a great quarter, with growth in digital coming in quite strong, broadcast revenues not coming in as weak as they could have, and the company providing pretty solid guidance moving forward. The dividend is a huge step in the right direction to improving shareholder returns and we do think that it will help Townsquare's stock outperform some of their peers. The only bone we could pick is that management did not discuss divesting the crypto assets that they own and using that money for debt paydown, share buybacks or something else to improve returns. Simply selling the crypto assets now, even if no debt was repurchased, would improve the net leverage ratio as cash would be on the balance sheet and also generate interest income.
Townsquare's dividend announcement was huge, and it is a reason we have been and will continue to be buyers of the stock moving forward. With the dividend policy now in place, this opens the stock up to many more investors and should over time help drive interest in the name. Even in this market we remain bullish on this name and now believe that the yield more than compensates investors to stick around until the next growth phase hits in 2024 - along with political ad revenues.
For further details see:
Townsquare Media: Let The Dividends Flow