Corus Entertainment: Is The 9.25% Dividend Safe?

In the interest of diversifying my dividend income stream, as I did with my last purchase of Exchange Income Corp., Corus Entertainment (TSX: CJR.B) offers my portfolio exposure away from the financials and energy positions I hold.

It’s hard to miss Corus Entertainment’s enticing 9.25% yield when the majority of high-quality stocks offer yields far closer to the 2% to 3% range; less than a third of what CJR.B offers in terms of immediate cash returns on a monthly basis. A 9.25% monthly dividend definitely sounds too good to be true. For this reason, let’s explore the important metrics to determine whether CJR.B’s dividend is safe or in line for a cut.

Historic Payout Ratio

The most important metric when determining the safety or future of a dividend is the dividend payout ratio. How much is the company paying out of earnings, cash flow, or funds from operations? It tends to vary exactly which metric is used to determine payout ratio, though most of the time it’s calculated from earnings. However, in this case, CJR.B calculates the payout ratio from their free cash flow, which is understandable.

I’ve skimmed through a variety of their financial statements and reports and in the majority of them they reiterate “that Corus intends to maintain the existing annualized dividend rate of $1.14 per Class B Share following closing of the Acquisition” (of Shaw Media).

As you can see, Corus Entertainment has been increasing their dividends steadily since 2004; and as many other stocks kept the dividend consistent throughout 2009 – 2010 (which we can’t penalize them for, considering they increased it by 23% the following year). If we look at the dividend as a percentage of free cash flow, Corus’ dividend has done incredibly well and would have been poised for a great deal more of dividend growth. We know that they have intentions to maintain it now after the $2.65 billion Shaw Media acquisition.

How’s it looking in 2016?

(*All results below are in thousands of Canadian dollars)

In Q1 2016, CJR.B generated free cash flow of $34,537, up 3.46% from Q1 2015 of $33,382. This is obviously good news.

However in Q2 this was down to $24,284 which is a decrease of 59% from Q2 2015 of $59,242. Not so good.

Here is their reasoning from their press release

Free cash flow for the six months ended February 29, 2016 was $58.8 million, compared to free cash flow of $92.6 million in the prior year. In the prior year, free cash flow benefited from the proceeds associated with the disposition of GoPro shares by Steamboat Ventures of $18.5 million. In addition, lower free cash flow in the current year reflects lower cash from operating activities compared to the prior year.

If we discount the $18.5 million gain from 2015, they would have generated $40.742 million vs the $24.284 million this year in Q2 – that drops the decrease from 59% to 40%, a little more bearable.

As a result, YTD, CJR.B has generated $58,821 in free cash flow vs $92,624 at the same point in 2015. This is a decrease of 36%.

The Dividend Safety

In Q1 2016, Corus Entertainment paid $25.4 million in dividends and had free cash flow of $34.537 million, as stated above. Therefore, in Q1, CJR.B’s payout ratio was roughly 73.5%.

Cumulatively of Q1 and Q2 2016, CJR.B paid $45.3 million in dividends and had free cash flow of $58.821 million. Therefore, YTD, CJR.B’s payout ratio hovers around 77% of free cash flow. This is really high when you look at the above chart where the payout ratio stays within the realm of 45% – 55%, but it’s not a terrible stretch.

Unfortunately, CJR.B has increased it’s leverage beyond it’s target zone with the acquisition of Shaw Media. From their press release,

The Company’s leverage will increase as a result of the Acquisition. The Company will, initially following the Acquisition, have higher leverage than its stated leverage target of 3.0 to 3.5 times. The Company’s maintenance of increased levels of debt could adversely affect its financial condition and results of operations. In addition, increased debt service payments could adversely impact cash flows from operating activities thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions, future business opportunities, and other general corporate purposes, as well as limiting the Company’s ability to pay dividends at current levels.

So… While they commit to maintaining the dividend at current levels, they also admit the increased risk in their ability to pay dividends as a direct result of increased leverage. I don’t think they will cut the dividend and believe they will continue to maintain it until the payout ratio comes down to a more comfortable level and hopefully start increasing again from there. For a 9.25% dividend paid monthly, I think the associated risk is worth it.