NEW YORK – North America media companies that ramp up shareholder initiatives to woo investors could be putting their credit quality at risk, according to Moody's Investors Service.
In a special comment entitled ‘North American Media and Entertainment: An Arms Race: Limited Growth Spurs Rising Equity Returns Amid High Cash Levels’, Moody’s said that companies such as Shaw Communications and Time Warner Inc. paid dividends in 2011 that exceeded a third of their free cash flow. That means their credit quality is at risk if these high payout rates continue to trend upward without other credit improvements, unless risk related to high payouts is already reflected in their ratings.
"Companies are increasingly using their large cash balances to boost dividends and share repurchases to attract investors, since growth and M&A opportunities have become limited or less desirable from an equity standpoint," said Neil Begley, a Moody's senior vice-president and author of the report.
Funding these initiatives with excess cash and free cash flow instead of debt means credit quality among the media and entertainment industry will be mostly unaffected. However, cash balances will likely decline to pre-recession levels if the economy remains stable. But dividends can erode credit quality if companies keep increasing already high payout rates as a percentage of pre-dividend free cash flow, especially if they have high exposure to cyclical revenue or have upcoming debt maturities which they may not be able to fund with annual free cash flow, according to the report.
