After talking about popular companies for the last couple days, I’ve had enough. I hate things that are popular. It’s like grade 9 all over again.
Instead, let’s talk about another unloved Canadian small-cap, FP Newspapers Ltd. (TSX:FP), which is the owner of several newspapers in Manitoba, most notably the Winnipeg Free Press and the Brandon Sun. It also owns a half dozen weekly community papers, along with a commercial printing division.
Yeah, it’s a newspaper. If you remember, I talked about Torstar back in the day, the parent company of the Toronto Star. I presented it as a way to profit off the Rob Ford crack scandal, all while getting paid a generous dividend. Plus, it has the highest circulation in the country, even beating out the nationally distributed Globe and Mail.
I didn’t end up investing in it, because I waited too long. I was hoping for the stock to dip below $5, but Prem Watsa showed up and announced a big stake in the company at about $5.20. I would have been up almost 50% if I would have bought then, and even 37% if I would have bought back when I wrote about it.
There are a lot of similarities between Torstar and FP Newspapers. Both are solidly profitable, even though revenues keep slowly declining. Both have dominant positions in their home market, and both pay succulent dividends. Both have traded at a huge discount to book value as well. And I think FP has a couple of potential catalysts that could propel the stock higher.
FP Newspapers has been publicly traded since the early 2000s (I’m too lazy to look up the exact date, but it’s been awhile). 51% of the company is privately owned, while the other 49% is publicly traded. The current market cap is $26.4 million, with 6.9 million shares outstanding. This stock isn’t as illiquid as others I’ve talked about, trading about 6,200 shares per day.
Throughout its history as a publicly traded company, PF has paid out just about all of its earnings to shareholders. It did the same while it was an income trust, and then paid out a little less when forced to convert back to a corporation. The stock currently pays out $0.05/share as a monthly dividend, good enough for a 15.67% yield. No, that’s not a typo. You’re really getting a 15.7% yield.
Well, at least for now.
2014 hasn’t been a kind year so far. Print advertising revenues have fallen by 7.7% compared to last year, while circulation revenue also took a bit of a hit. Folks are still (mostly) buying the paper, but advertisers are continuing to withdraw their ad dollars.
Of course, this problem has been going on for years, and FP is no stranger to it. The company continues to cut costs and lay off workers in interesting ways. The latest offering was giving several senior staffers an incentive to take a cash deal on their pensions. Here’s the money (plus a little extra), now get out so we can not replace you.
Earnings have been slowly declining. Let’s look at the last dozen quarterly profits, on a per share basis. Remember, the stock pays a $0.15 dividend each quarter.
- 2014 Q2 – $0.17
- 2014 Q1 – $0.08
- 2013 Q4 – $0.23
- 2013 Q3 – $0.12
- 2013 Q2 – $0.22
- 2013 Q1 – $0.14
- 2012 Q4 – $0.29
- 2012 Q3 – $0.14
- 2012 Q2 -$0.19
- 2012 Q1 – $0.12
We’ll stop there. You can see the gradual reduction in earnings, something that’s bound to continue over time. Therefore, investors should expect the dividend to slowly creep down. It could hit $0.04/monthly as soon as next year, but unless the business really takes a dive, it’s reasonable to expect it to continue, albeit maybe at a lower value.
Three reasons to buy
Forget the dividend for a second. Yes, it’s nice to collect, but it’s silly to buy into a company with nothing going for it but a big dividend. There are a few other catalysts that could send shares higher.
This is the weaker argument, so we’ll explore it first.
In the company’s last quarterly report, management openly mused about instituting a paywall, strongly hinting that something could be happening on that front sometime soon. While a paywall will cut down traffic to the website significantly, it will also bring in steady revenue. This could help stem the tide.
The company has a sort-of paywall now, for folks outside of Canada. I did a little poking around and saw that I needed to hit 50 articles before the paywall kicked in. That seems a little generous.
A paywall would help, but it’s not a game changer by any means.
2. Strong, local brand
The circulation numbers in Winnipeg aren’t even close. Counting all print and digital sales, The Free Press is the winner by a mile, distributing 687k copies weekly. The Winnipeg Sun only manages to do about half of that, or 391k copies weekly. Metro Winnipeg is a distant 3rd, coming in at a weekly circulation of 207k. Metro is a free paper, but is printed by FP.
To put those numbers into perspective, they’re pretty much on par with the leaders in other cites with larger populations. The Calgary Herald has a total distribution of 708k, just a little higher than the Free Press, but with a significant population edge. The Vancouver Province has a circulation of 840k, but it has pretty significant competition with the Vancouver Sun, which leads it by 130k.
It’s the same thing with larger cities like Edmonton (The Edmonton Journal leads with a circulation of 583k), Ottawa (The Ottawa Citizen leads with a circulation of 661k), and even Montreal, which has more than 5x the population but its leading newspaper — Le Journal — only has a circulation 3x that of the Free Press.
Per capita, the Free Press might be the strongest newspaper in Canada. Buying the best is important in a weak industry.
Last week, Postmedia made news (heh) when it acquired Quebecor’s English speaking newspapers. These mostly include the Sun papers across the country, as well as a bunch of small community weeklies. The purchase price was $316 million, give or take a few bucks.
The reasoning is simple. Postmedia owns most of the dominant players in Canada’s major markets. It owns the Herald in Calgary, the Journal in Edmonton, the Citizen in Ottawa, both the Province and Sun in Vancouver, and so on. In most markets, the Sun is squarely in second place. The plan is to run both papers separately, while getting synergies by doing stuff like having one sales force and consolidating office space.
Does this mean FP is the next target? It makes sense, depending on how well this works in other markets.
It isn’t just Postmedia that’s consolidating the media space. Torstar owns dailies around the Toronto area, as well as a stake in most of the Metro papers across the country. Power Corporation owns 7 daily newspapers in Quebec. TC Media (a division of Transcontinental) owns 11 daily papers across the country from Nova Scotia to Saskatchewan. Even Glacier Media owns 7 dailies in B.C., including the only daily in Victoria, the Times Columnist.
FP has a market cap of $26 million, which represents half the company. It isn’t a big deal for one of these larger players to acquire it. Torstar is flush with cash once it closes its sale of Harlequin romance novels to News Corp. for $445 million. Transcontinental has a market cap of over $1 billion. Power Corporation has all the money in the world. There are plenty of potential buyers, and it makes sense to consolidate the space.
Wrapping it up
While I like the name, I think you shouldn’t be in any rush to buy it. At least, I’m not.
The stock does tend to move with the TSX, and there’s no end in sight for the slaughterfest that is the index. If I was in charge, I’d probably use this general weakness to cut the dividend to 4 or 4.5 cents, but I can understand management’s thought process in keeping the divvy intact.
When it does cut the dividend, reaction should be pretty muted. There’s still plenty of cash flow to cover a slightly lower dividend, and earnings are still holding up pretty well. Expect to see more of the same going forward — a slow deterioration of the business.
FP Newspapers offers investors the chance to invest in an income stream that should return greater than 10% for the foreseeable future. It returns 15% now, and earnings are only slowly deteriorating. If you add in the potential for a takeover, FP could be a winner. But be patient, I think you’ll be able to buy at a lower price.