- I find Time Warner stock an excellent combination of value and a high growth dividend stock.
- TWX generates strong cash flows and returns substantial capital to investors through stock buybacks and dividend payments.
- The average target price of the top analysts is at $80.75, which appears reasonable, in my opinion.
Time Warner (NYSE:TWX) had another very successful year in 2015, and according to Jeff Bewkes, Time Warner's Chairman and CEO, the company is set up for another record year in 2016. Management's 2016 guidance was for about 13% growth in adjusted EPS. However, in my view, the growth could be significantly higher. Historically, Time Warner has given conservative guidance, resulting in significant earnings surprises in the last few quarters. I see HBO as a key growth driver for the company.
According to Time Warner, subscription revenue growth at HBO will accelerate this year and next year. HBO Now, the company's HBO digital streaming service, has gathered nearly one million subscribers since its launch in April 2015. In my opinion, HBO Now is an important move by Time Warner into the digital streaming space, and it will benefit from premium HBO content. CEO Jeff Bewkes has identified on-demand anywhere anytime viewing of video content as a strong secular trend. Another growth driver for the company is Time Warner International. This segment revenues consist of advertising and subscription revenues and have grown at an average annual rate of over 9% in the last five years. The impressive growth can be attributed to the company's international expansion. By the end of 2015, Time Warner distributed its content through various networks in more than 200 countries around the world.
On February 10, Time Warner reported its fourth quarter and full year 2015 financial results, which beat EPS expectations by $0.05 (5%). However, the company posted revenue of $7.08 billion in the period, falling short of Street forecasts of $7.55 billion. Time Warner showed significant earnings surprises in each of its last four quarters, as shown in the table below.
Source: Yahoo Finance
Full Year 2015 Highlights
- Revenues increased 3% to $28.1 billion
- Company posted Adjusted Operating Income of $6.9 billion
- Adjusted EPS grew 14% to $4.75
- Free Cash Flow totaled $3.6 billion
- Company repurchased 45 million shares for $3.6 billion
- Board authorized a 15% increase in quarterly dividend for March 2016 and a new $5 billion share repurchase program
Since the beginning of the year, Time Warner stock price is up 9.7% while the S&P 500 Index has decreased 1.4%, and the Nasdaq Composite Index has lost 5.6%. Since the beginning of 2012, Time Warner stock has gained 96.3%. In this period, the S&P 500 Index has increased 60.3% while the Nasdaq Composite Index has risen 81.5%. According to TipRanks, the average target price of the top analysts is at $80.75, an upside 13.8% from its March 15 close price, which appears reasonable, in my opinion.
Time Warner Stock Valuation
Time Warner's valuation metrics are very good. The trailing P/E is at 15.34, and the forward P/E is very low at 11.71. Moreover, the Enterprise Value/EBITDA ratio is low at 9.82, and the PEG ratio is very low at 0.85. The PEG ratio - price/earnings-to-growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
In addition, Time Warner's profitability parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the table below.
On February 9, 2016, the company increased its quarterly dividend by 15% to $0.4025 per share or $1.61 annually. The forward annual dividend yield is at 2.27%, and the payout ratio is only 23.8%. The annual rate of dividend growth over the past three years was at 10.4%, over the past five years at 10.5%, and over the last ten years it was high at 16.7%. From January 1, 2015, through February 5, 2016, the company repurchased approximately 52 million shares of common stock for approximately $4.1 billion. In January 2016, the company’s Board of Directors authorized a total of $5 billion for share repurchases beginning January 1, 2016, including the amount remaining under the prior authorization.
Time Warner stock presents an excellent combination of superb value and a high growth dividend stock. The company has recorded substantial growth in the last few years. Time Warner's annual average EPS growth over the last five years was very high at 15.2%, and the average annual estimated EPS growth for the next five years is also very high at 15.6%. Moreover, the company generates strong cash flow and returns substantial capital to its shareholders through stock buybacks and growing dividend payments. The average target price of the top analysts is at $80.75, implying an upside of 13.8% from its March 15 close price, which appears reasonable, in my opinion.