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Saturday, January 16, 2010

j2 Global: Plenty of Excess Cash for a Dividend; Why Not? World Wrestling as Example?

Following up on our j2 Global Communications (JCOM, $19.32) post the other day regarding all of the cash that is piling up on the company's balance sheet (and whether JCOM is a value trap).

We expect j2 may announce plans for excess cash in conjunction with the company's 4Q09 earnings call in February. Once the Market is made aware of expected uses (beyond potential M&A), shares may finally push higher. That said, lasting value depends on continued prudent allocation of shareholder capital.

Given j2's large cash pile and steady cash generation, we see no reason why j2 couldn't use cash in three ways: (1) sensible acquisitions, (2) share repurchase, and (3) initiation of a dividend (if lacking sufficient, other high ROIC opportunities -- *we think the business simply generates too much cash, which is a good thing). With annual free cash generation of more than $90 million ($2.00 per share), j2 could easily payout one quarter of this amount ($0.50 for 2.5%) and still retain a large cash pile for options (1) and (2). Historically, acquisitions have usually been small, leaving meaningful excess cash for other options.

Actually, with $222.5 million of net cash as of 9/30/09, j2 could afford to initiate a higher annual dividend, say $1.00 per share (5.0% yield). Without tapping the existing cash balance, such a payout would require only one half of annual free cash generation and likely leave another $45+ million to accumulate on the balance sheet for acquisitions and/or share repurchase.

Another option is to pay an even higher dividend, akin to World Wrestling Entertainment (WWE, $15.99). World Wrestling pays an annual dividend of $1.44 per share (9.0%), which -- at first -- appears a red flag since annual earnings are only $0.70-0.80. However, at 9/30/09, the company had a net cash position of $202 million (17% of market capitalization) and trailing twelve month free cash flow was approximately $101 million (8.6% FCF yield). Over the past year, the company's net cash increased despite a huge payout. With an asset light business model (*although capex can vary year to year) and prudent working capital management (*note: w/c requirements not consistent over past several years - need to watch), World Wrestling appears capable of making $82 million in annual dividend payments and leaving the large cash pile entirely untouched. Per management commentary and guidance, the company expects to grow into the dividend over the next several years, improving coverage through reported EPS.

In The Aggressive Conservative Investor, Martin Whitman and Martin Shubik write the following about dividends (page 240):
  • "A long-run, consistent dividend policy is frequently essential if a company is to obtain general recognition in the financial community as a high-quality issuer. Such recognition tends to result in better prices for a company's common stock over the long-term, and may attract outside stockholders who are stable investors interested in income (insurance companies for example) rather than in-and-out traders or go-go speculators."
We think a dividend might lead to a higher multiple for JCOM. At present, the Market -- probably on value trap fears (please see prior post) -- is currently offering JCOM for an 11% (9.0 multiple) yield on market capitalization and a 15% FCF yield (6.5 multiple) on enterprise value (okay to use FCF to EV since interest income is very small at present). It's true that j2 Global can repurchase shares on a highly accretive basis at current levels, yet we think the Market would very likely reward the company (and shareholders) if it became a regular dividend payer. Let's see what unfolds in coming months.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long JCOM.

© 2010 Jeffrey Walkenhorst
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  1. Great JCOM writeups, Jeff. Management often compares acquistion target prices to the current JCOM valuation which is what we like to hear. They should be prudent in deploying the large cash balance.

  2. Thanks Brian. Based on prior allocation and performance, you're probably correct.


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