Seven West Media Ltd (ASX: SWM) has slashed its interim dividend by 33% from 6 cents to 4 cents, despite a slight increase in underlying net profit.
The diversified television, newspaper, radio, and magazine company reported an underlying net profit of $140.3 million for the six months to December 2015 (1H FY16), up 2% compared to the first half of the 2015 financial year (1H FY15).
Seven West announced a buy back in September 2015 of up to $75 million worth of shares, but has so far bought back just under $4 million. More than likely funds have been redirected to paying down the monster net debt balance, which has dropped from more than $1 billion at the end of June 2015 to $655.5 million at the end of December 2015.
The problem Seven West faces is structurally declining advertising revenues across television (-5.8%), newspapers (-14.8%) and magazines (-15.5%). Only digital advertising is growing, but it remains a tiny proportion of the group's overall revenues.
As a result, earnings before interest and tax (EBIT) fell 9.4% in 1H FY16 compared to the previous period, and the company is forecasting Group EBIT for the full 2016 financial year to be down around 10%.
As fast as Seven West is pulling costs out of the business, advertising revenues are sinking faster, which can only lead to one conclusion if allowed to continue for many more years. Costs for the group were down 4% to $687.5 million, but revenues were down 5.3% to $892.9 million.
What next for Seven West?
As much as the company wants to crow about having the highest market share of the free-to-air TV market compared to Nine Entertainment Co Holdings Ltd (ASX: NEC) and Ten Network Holdings Limited (ASX: TEN), and increasing market share in the magazine publishing business, both are structurally declining markets.
Falling revenues could accelerate at any time, particularly with the arrival of streaming services such as Netflix in Australia, and it's a race for Seven to build up its digital media offerings before its free-to-air, magazine and newspaper businesses are worth slightly north of zero.
Foolish takeaway
Don't be mislead by the company's trailing dividend yield of over 12%. The interim dividend has already been slashed and the final dividend is likely to follow suit. Investing in structurally declining sectors is not for the faint-hearted, and with better opportunities out there, Foolish investors might want to give Seven West Media a miss.
Investing in structurally declining sectors, despite their yields on offer, is not for the faint-hearted. With better opportunities out there, Foolish investors might want to give Seven West Media a miss.
