Time Warner Inc. Stock Is Even More Attractive After Earnings

  • Time Warner delivered first-quarter results that were better than analysts' expectations.
  • Moreover, management reaffirmed its 2016 EPS guidance of $5.30-$5.40, which implies 13% growth.
  • The company generates strong cash flow and returns substantial value to its shareholders through stock buybacks and increasing dividend payments.

After a very successful year in 2015, Time Warner (NYSE:TWX) has had a very encouraging start to 2016. On May 04, Time Warner reported strong Q1 2016 financial results, which beat EPS expectations by $0.19 (14.6%). The company posted revenue of $7.31 billion in the period, also topping street forecasts of $7.24 billion. The company has reported a significant earnings per share surprise in all of its last five quarters, as shown in the table below.

Source: Yahoo Finance

Revenues increased 3% to $7.3 billion due to growth at Turner and Home Box Office (HBO), partially offset by a decline at Warner Bros. Revenues included the unfavorable impact of foreign exchange rates of approximately $115 million in the quarter. Adjusted operating income grew 11% to $2.0 billion due to growth across all operating divisions, partially offset by higher corporate expenses.

In the report, Chairman and Chief Executive Officer Jeff Bewkes said:

We’re off to a terrific start to 2016, as we benefit from the investments we’ve been making in great content and new capabilities in order to take advantage of the growing demand for high-quality video content around the world. Revenues increased 3% and Adjusted Operating Income grew 11% to a quarterly record of $2 billion due to strong growth across all our operating divisions. In the past several weeks, we’ve seen Warner Bros. release its latest global hit in Batman v Superman: Dawn of Justice, setting the stage for what we expect to be a big year in film, with upcoming releases including Suicide Squad and Fantastic Beasts and Where to Find Them. In television, Warner Bros. continued to show its strength with three of the top five new shows on broadcast television this season among adults 18-49 and a record 21 renewals ahead of the upfront this year.

Management reaffirmed its 2016 EPS guidance of $5.30-$5.40, which implies 13% growth at the midpoint of the range. However, in my view, the growth could be significantly higher. Historically, Time Warner has issued conservative guidance, resulting in significant earnings surprises in the last few quarters.

I see continued high growth prospects for the company. Turner, which had three of the top 10 basic cable networks in the U.S., has continued to make progress on a multi-year transformation of its brands. Turner accounted for 61.6% of the company's adjusted operating income in the first quarter of 2016. According to the company, nowhere is Turner's change more evident than at CNN, which more than doubled its primetime audience in the first quarter. CNN's ratings benefited from its reliable coverage of the U.S. presidential race as well as from its continued success with original series. Those two areas overlapped in Race for the White House, which premiered as the most-watched CNN original telecast ever. As the U.S. presidential race continues, Americans will elect the 45th president of the United States on November 8, 2016, CNN's ratings are expected to increase even more.

Dividend and Share Repurchase

As I see it, Time Warner stock is an excellent candidate for a diversified, large-cap dividend stock portfolio. The company generates strong cash flows and returns substantial value to its shareholders through the stock buyback and increasing dividend payments. For the first three months of 2016, cash flow from continuing operations reached $757 million and free cash flow totaled $714 million. As of March 31, 2016, net debt was $22.1 billion, up from $21.6 billion at the end of 2015, due to debt used for share repurchases and dividends, partially offset by the generation of free cash flow.

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 2.17%, and the payout ratio is only 29.5%. The annual rate of dividend growth over the past three years was at 10.4%, over the past five years was at 10.5%, and over the last ten years was high at 16.7%.

Source: company’s reports  *assuming same dividend rate for the year

The company repurchased $711 million of its stock in the first quarter of 2016 and $3.6 billion in 2015. The share count has fallen about 5% over the last year.

Valuation

Time Warner's valuation is very good. The trailing P/E is at 15.05, the forward P/E is very low at 12.39 and the price to cash flow ratio is also very low at 4.71, the fifth lowest among all 81 S&P 500 Consumer Discretionary companies. Moreover, the Enterprise Value/EBITDA ratio is low at 9.99, and the PEG ratio is very low at 0.95.

10 S&P 500 Consumer Discretionary stocks with the lowest price to cash flow

Source: Portfolio123

Conclusion

As I see it, Time Warner stock is an excellent candidate for a diversified, large-cap dividend stock portfolio. The company generates strong cash flow and returns substantial value to its shareholders through stock buyback and increasing dividend payments. Time Warner delivered first-quarter results that were better than analysts' expectations. Moreover, management reaffirmed its 2016 EPS guidance of $5.30-$5.40, which implies 13% growth at the midpoint of the range. However, in my view, the growth could be significantly higher. Historically, Time Warner has issued conservative guidance, resulting in significant earnings surprises in the last few quarters.

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