In the film The Lord of the Rings: Fellowship of the Ring, Bilbo Baggins observes that Hobbits love all things that grow. Much like the admirable hobbits, Time Warner's (NYSE: TWX ) management believes that growing the company's stock price is important, and puts its money where its mouth is. Sometimes picking a stock is as simple as looking for strong cash flow and management that knows what to do with it. With the stock up around 50% in the last year, can the company keep this run going?
In sticking with the hobbits theme, in order to understand Time Warner, investors need to understand the entertainment industry. You could call the entertainment industry The Shire of the investing business. Entertainment companies are constantly trying to create properties and grow them.
In this business, there are old-school elves like Walt Disney (NYSE: DIS ) that have been around for ages. The company grows not only by expanding its own content, but by acquiring top content as well. Speaking of acquisitions, Comcast (NASDAQ: CMCSA ) became a major player in the entertainment business when it decided to buy out the remainder of NBCUniversal from General Electric.
One difference between Disney, Comcast, and Time Warner is that the latter gets a much larger portion of its revenue from movie studio Warner Bros. than the other two receive from their studios. In the most recent quarter for each company, Time Warner generated about 40% of its revenue from Warner Bros., whereas Disney's studio entertainment division produced just 13% of revenue. Comcast is more heavily weighted toward its cable operations, and generated less than 10% of revenue from filmed entertainment.
Given the heavy weighting toward film production at Time Warner, it's critically important that the company strike while the iron is hot. Management has consistently rewarded shareholders through increased dividends and share repurchases, which shows that it can tend its part of the Middle Earth garden to make it grow.
One cash flow to rule them all
For investors who want strong cash flow growth from their companies, they need look no further than Time Warner. The company's nine-month core operating cash flow (net income + depreciation) increased by more than 36% on an annualized basis. Compared to Disney's increase of 8.2% or Comcast's decline of 7%, Time Warner's cash flow growth smashes the competition like an angry cave troll.
As you might imagine, with strong cash flow growth comes the opportunity to reward shareholders. In the last year, Time Warner also bested its rivals by retiring 3.6% of its diluted shares. Back in February the dividend was increased by 11%. What's more, the company has retired at least $1.9 billion in shares in each of the last three years, and this dividend increase was the seventh in the past nine years.
The coming Desolation
If there is a weak spot in Time Warner's armor, it's that the company's film division witnessed a 7% annual decline in the last quarter. With tough comparisons to last year's The Dark Knight Rises, the company's current-quarter films couldn't keep up.
However, the recently released Gravity looks like a hit for the company, and the big release for the year is The Hobbit: The Desolation of Smaug. Time Warner is betting big on this second part of The Hobbit, as the first part, The Hobbit: An Unexpected Journey, released to less than rave reviews.
The second part of the series is expected to have more action scenes, the return of fan-favorite Legolas reprised by Orlando Bloom, and the additions of new names to the series like Benedict Cumberbatch (Star Trek Into Darkness and the TV series Sherlock) and Evangeline Lilly (Lost). These personalities should help breathe new life into the series.
If Time Warner can strike a mighty blow with this next Hobbit film and continue rewarding shareholders with increased dividends and share repurchases, this could be a stock to hold for the next age. If management has anything to say about it, shareholders' returns will be anything but small.
Who will rule the media kingdom?
The future of television begins now… with an all-out $2.2 trillion media war that pits cable companies like Cox, Comcast, and Time Warner against technology giants like Apple, Google, and Netflix. The Motley Fool's shocking video presentation reveals the secret Steve Jobs took to his grave, and explains why the only real winners are these three lesser-known power players that film your favorite shows. Click here to watch today!