How Viacom’s Share Repurchase Strategy Fell Flat

Viacom (NASDAQ:VIA), like other media companies, has been aggressively buying back its stock over the past few years, but it hasn’t worked out particularly well for the company. The current market price of Viacom’s stock is much lower than the average price it spent to buy back those shares in the past five years. Many believe that the company’s stock is oversold, and that investors have overreacted to Viacom’s ratings decline. In fact, our price estimate for Viacom is significantly higher than the current market price, but it is in line with street estimates, according to the Wall Street Journal. Having said that, apart from the industry-wide concerns over cord cutting and the rise of alternative video platforms, Viacom’s own problems have also contributed to this fall. In this note, we discuss the factors that led to this massive decline in Viacom’s stock price.

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Viacom’s Share Repurchase Strategy Hasn’t Worked Out Well

Viacom has spent $15 billion in buying back its stock at an average price of $60.62, much higher than its current market price of around $46, thereby losing over $3.5 billion. This compares with Disney’s $24 billion repurchases at an average price of $51, much lower than its current market price of $104. ^[1]

Viacom’s stock price has plunged 40% so far in 2015, with much of this fall coming in August. The company reported June quarter earnings more or less in line with street estimates, but the reason for the fall was the statement made by Disney (NYSE:DIS) during its earnings conference call. Disney said it expects modest subscriber losses at its cable networks and this led to panic selling across media stocks, with Viacom the worst hit.

Changing Media Landscape Is Weighing On Viacom

The entire media landscape is changing, with the rapid growth of alternative video platforms such as Netflix and Hulu and increased viewing on other devices, such as smartphones and tablets. This has produced a decline in traditional television viewership, which has caused massive ratings decreases for many networks. Viacom’s cable networks are the worst hit, with Nickelodeon down 30% among kids 2 to 11, Comedy Central down 23% among adults 18-49 and MTV taking a hit of 22% in the 12-34 demographics during the June quarter. ^[2] A similar ratings pattern was observed in the first quarter as well. Networks such as MTV and Nickelodeon primarily target the younger generation, which is rapidly shifting to digital platforms.

Viacom’s Own Problems Contributed To The Decline 

It’s not just the industry trends weighing on Viacom; the company has its own problems. Viacom is far less diversified than its other media peers. It does not have any sports programming, a premium cable network or a broadcasting network. It does have a handful of popular cable networks such as Nickelodeon and MTV and a comparatively smaller studio (Paramount). As a result, its revenues are heavily dependent on television ratings, which help determine how much distributors pay to carry Viacom’s programming. Accordingly, Viacom’s dependence on advertising is very high, making it more vulnerable to industry and advertising trends. This has led to a steeper fall in its stock price in the recent months.

Even with its handful of cable networks, Viacom for long resisted making big investments in original programming. In the June quarter, Viacom took a $785 million charge, primarily to cover the cost of older shows that are no longer as valuable. However, Viacom also said that it will increase its investment in original programming. ^[3] The demand for repeats as well as reality shows is fading, and media companies are well aware of this trend. 21st Century Fox (NASDAQ:FOX) took a big decision to not renew one of its most popular reality shows, American Idol, given the fading demand and declining ratings.

Another reason for this steep fall in Viacom’s stock price is the concern for investors that the pay-TV distributors may decide to sell bundles without Viacom’s cable networks. While this is unlikely to happen across pay-TV operators, given the popularity of some of Viacom’s cable networks, such as Nickelodeon, it could well be the case for some of the distributors such as Dish Network (see – What Happens If Dish Decides To Drop Viacom?). One can argue that Viacom is seeing growth in licensing revenues, but even there, online video platforms such as Amazon Prime and Netflix now buy content for a handful of shows rather than an entire library of a network. Now it becomes even more important for media companies to invest in original programming so that there is enough demand across various viewing platforms.

On the brighter side, many believe that Viacom’s shares are oversold and there could be substantial upside potential. It should be noted that the magnitude of fall in Viacom’s advertising revenues has been far less than its 20%+ decline in ratings. This suggests that not all cable programming is Nielsen dependent, something that Viacom has long been stating (see – The Steep Fall In Viacom’s Stock Post Earnings Is Unwarranted).

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1. Viacom CEO Dauman Loses $3.4 Billion Betting on His Own Company, Bloomberg, Aug 11, 2015 [↩]
2. Drawn and Quartered: Ongoing Ratings Slide Will Take a Bite Out of Cable Earnings, Advertising Age, July 13, 2015 [↩]
3. Viacom’s Press Release, Apr 6, 2015 [↩]