Why Wells Fargo Favors A Dividend Suspension At Viacom?

In a research note published Tuesday, Wells Fargo argues for a suspension of dividend rather than a cut, given the balance sheet travails of the company. Citing Bloomberg reports that a sale of Paramount is off the tables, as the company seeks to revisit the sale, if need be, after a fix under the new management, and the suspension of buybacks, the firm said it is of the view that the board should suspend the dividend in entirety. However, such a move might be a market shocker.

Analyst Marci Ryvicker also explores the other course of action of incremental dividend cuts, one now, in line with market expectations of a 50 percent reduction, and another to follow a month later.

Dividend Suspension Plot Line

The firm's quest for dividend suspension stems from the fact that the company has higher than targeted leverage ratio and the debt repayments coming up over the next 12 months. Wells Fargo noted that the company will still fall $300 million short if it chooses to use its free cash flow and cash on hand. A 50 percent cut will just cover it, although a suspension is seen to leave the company with $300 million in cash. This cash, according to the firm, is below what it had carried in the past.

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Wells Fargo's concern is still regarding the fundamentals of Viacom, with the firm reducing its EBITDA and FCF estimates consistently. Instead of effecting incremental cuts, which might be demoralizing for investors and the stock, the firm favors a suspension.

Other News, Analysis

Wells Fargo also does not foresee a combination with CBS Corporation CBS. The firm feels the $1 billion synergy touted from the potential combination as unrealistic.

Wells Fargo has a $34 to $36 valuation range for the shares of Viacom, and it reiterated its Underperform rating on the shares.

Despite all the chatter of a dividend suspension/cut, shares of Viacom were up modestly at the time of writing. However, by the time of publication, the stock had reversed and was seen down 1.17 percent on the day at $36.34.

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