One of the advantages that wealthy folks have is that they can afford to embrace things like bear markets and recessions with open arms. Their mentality to something like 2008/2009 would be to bust out the metaphorical shopping cart whilst the rest of us would be running away from the store. You know what a great example of this is? Media company stocks. They represent great opportunities when they’re bombed out yet there will always be investors who buy at the peak of the cycle and then dump at the bottom. It kind of goes without saying but that is an incredibly damaging mentality with respect to a share portfolio.
For the purposes of this post I’m going to use an equal weighted portfolio consisting of The Walt Disney Company, Time Warner, Twenty-First Century Fox (listed as News Corporation until 2013), CBS Corporation and Viacom. Instinctively when you look at that little group you’re going to be nodding your head thinking what an attractive portfolio of assets that represents. Remember these are now diversified behemoths with divisions ranging from movie studios and theme parks to TV networks. I mean you could probably fill up this whole post just going through the list of assets they collectively own between them.
Anyhow, the upshot is that they generate pretty monumental levels of profitability between. Add up all the advertising revenues, subscription fees, affiliate fees and their cut of movie ticket sales and around 10% of that ends up on the bottom line as net income. Who wouldn’t want to own a slice of that?
The other point that’s worth noting though is that they tend to get hit pretty hard during recessions and economic downturns. If we just run through the basket then between 2008 and 2009 you would’ve seen an average earnings per share drop of nearly 33%. Now when you think about that kind of business performance in terms of the economy it makes perfect sense. Firstly a lot of this stuff is pretty discretionary from the consumer point of view. If unemployment shoots up you get a lot more folks saying “You know maybe we won’t go to the movies tonight”, or “Look we’re going to have to put that vacation to Disneyland on hold for a year”. These are the easy costs to cut of your life when you need to make your personal finances a little bit leaner.
Secondly from a corporate point of view you get the same effect with respect to advertisers. If you’re running a business and looking to make easy short-term cost savings it’s very tempting to look at the advertising budget first (or to negotiate cheaper rates). Remember our basket of stocks has got assets like ESPN, Cartoon Network, ABC, Nickelodeon, CNN and Fox News Group. That means they get a heck of a lot of advertising dollars coming their way. If I just single out Time Warner randomly then you’ll find that in 2009 their revenues from advertising suffered an 11% hit compared to 2008.
As you’d expect there was kind of a no mercy approach to all of those headwinds in the market place. Running through the basket one at a time and you’ll find that Disney’s stock price fell from $31.50 to $16.05 between March 2008 and March 2009; Time Warner’s went from $30.25 to $14.60; Fox/News Corporation dropped from around $16.30 per share to $4.66 per share; Viacom’s stock price dropped from $40 a share to $14.25 a share; and, astonishingly, CBS fell a whopping 85% from a share price of $22.45 to $3.99, along with a huge dividend cut and legitimate concerns surrounding the health of its balance sheet. As for the overall dividend situation it actually held up pretty darn good for our group. In total there were three freezes – Disney, Time Warner and Fox/News Corporation – and one cut – CBS Corporation. Viacom only started paying out a distribution in 2010.
Remember when I said wealthy folks get to embrace bear markets? Well, just check out what happens when you’re in a position to commit significant funds to bargain basement high quality cyclical stocks. Let’s say we’ve got a well-off family with a spare $100,000 cash to deploy at this point. Seeing the turmoil in the stock market they decide that the big media stocks represent fantastic medium-term opportunities because their cyclical nature means they’re getting hit harder than other blue chips.
Okay, so with $100,000 on the table and an equal weighted basket of The Walt Disney Company, Time Warner, Fox/News Corporation, CBS Corporation and Viacom we’re looking at $20,000 worth of stock for each. Using the bombed out share prices above our family would have been looking at 1,246 shares of Disney stock; 1,369 shares of Time Warner stock; 4,291 shares of Fox/News Corporation stock; 5,012 shares of CBS stock; and 1,403 shares of Viacom stock. The portfolio’s valuation would’ve averaged well under 10x forward (2009) earnings and its average dividend yield at that point would have been around 3% (it would have been higher if you exclude Viacom, which didn’t start paying a dividend until a year later).
In the years that follow your average annual returns would’ve looked something like this: 29% CAGR for Disney stock; 28% CAGR for Time Warner; 28% CAGR for Fox/News Corporation; 44% CAGR for CBS; and 16.2% CAGR for Viacom. Yes, even in the case of Viacom, which has been in total turmoil over the past few years, you still would’ve scratched out double-digit annual returns. Total dividends paid out to date would already be over $50,000 (assuming they just piled up in a broker account).
In total our hypothetical wealthy family would currently be worth looking at something like $858,275 off of that initial $100,000 investment (these figures include dividend reinvestment). From a current income perspective the yield on cost would now be over 10%, supplying more cash each and every year to reinvest or buy-up more cash producing assets. This is where the triple of whammy of multiple expansion, earnings growth and cash dividends goes into overdrive. You can’t predict when it will all come together, but when everything lines up in a 2009 type situation you end up with huge wealth creation opportunities if you’ve got the means to take advantage.