The Washington Post Company‘s dismal quarterly earnings release last week was received with something of a shrug—more of the same. But the report is worse than the reaction suggests and raises fundamental questions about the Post’s strategy, not just for the newspaper, but for the whole company.
If you hadn’t heard, the Washington Post Company is basically a for-profit college/SAT-prep firm that sidelines as a cable-TV provider and newspaper publisher. The august Washington Post (I’ll italicize Post here when referring to the newspaper and won’t when referring to its parent) contributed just 15 percent to its namesake company’s revenue in the first quarter but was a $23 million drag on the bottom line.
Kaplan, the Post’s education division, is the company’s cash cow, and a few years ago looked like the newspaper’s savior. But its revenue has fallen sharply over the last year and a half since for-profit schools, very much including Kaplan’s, came under pressure for predatory practices. Its sales tumbled 14 percent from 2010 to 2011 and dropped another 11 percent in the first quarter.
Its deteriorating prospects spells more trouble for the Post’s newspaper division, whose very bad first quarter included not only that $23 million loss but also a 7 percent decline in revenue. Crucially, its digital ad revenue—the paper’s main hope for the future—went into reverse and hit negative 8 percent. It’s just the latest in a long line of bad results.
The Post’s newspaper division (which includes Slate) has posted losses in thirteen of the last fifteen quarters, a trail of red ink that has led to cumulative losses of $412 million over the period. Its revenue has declined in twenty of the last twenty-two quarters and last year it brought in fully one-third less—$314 million—than it did at its peak in 2006. Layoffs have reduced the Post’s newsroom to a little more than half its peak size.
Despite this, the company continues to fork over hundreds of millions of dollars to shareholders in the form of dividends and share repurchases. The Post is disgorging the cash, as JW Mason calls it, to investors and depriving its businesses of resources.
The company as a whole is still profitable and has earned a total of $546 million since the start of 2008, when the financial crisis began in earnest. But in that same time it has spent more than twice that—$1.1 billion—on buybacks and dividends that have helped put a floor under its share price (and its earnings per share).
Much of that money is being squandered to appease the short-term interests and cash needs of shareholders, who very much include the Graham family, which controls the voting shares of the Post.
While the company has been bleeding revenue and income in the last year-plus, it has actually been increasing the amount of cash it pays out in dividends. Last year, it paid a $9.40 dividend for each share—a total cash payout of $75.5 million to shareholders. It has raised its dividend in nine of the last ten years for a total increase of 69 percent. The stock now yields a healthy 2.9 percent, a richer dividend payout than shareholders get from giant, cash-flush firms like Exxon Mobil, Apple, Microsoft, and Walmart.
This is like some kind of recurring nightmare for iconic American newspaper brands. It was only five years ago that Audit Chief Dean Starkman wrote this about Dow Jones, The Wall Street Journal’s publisher, which was bled dry by decades of dividend demands from the feckless Bancroft family.
A dividend is a cut of the profits earned by the business during the year. It is not guaranteed, and, in fact, must be set every quarter by a company’s board of directors. The idea is, you might need the money for something else at any time.
A dividend is capital that you are returning to shareholders because the business has no better use for it. No one believes DJ didn’t need to grow to remain independent. And does anyone believe the newspaper business isn’t in transition and that lots of capital might be needed to help with that shift?
Now of course, Dow Jones is stuffed and mounted in Rupert Murdoch’s man cave. Perhaps he can pick up the Post at some point.
Even worse than raising dividends in a time of distress and disinvestment, the Post has binged on buying its own shares back from investors, spending $912 million since the program began six years ago and paying an average price of $424 a share. Those shares are worth $337 as I type, which means the Post has taken a $187 million bath on them—a 21 percent loss.