When screening for companies with higher dividend yields, it doesn't take long for Paramount Global (PARA +0.00%) to come up. Its attractive 5.1% payout might have this stock on investors' short lists.
And with Warren Buffett's Berkshire Hathaway (BRK.B +0.86%) owning 15% of the company, it is reassuring that one of the world's greatest investors is backing Paramount. But the stock has performed horribly, tumbling 44% from last year and down 80% from its all-time high (after a two-day spike in 2021).
Should you follow Buffett's lead and buy Paramount? Or is this stock on its last legs?
Paramount's success depends on creating and owning great content
Paramount is a legacy media maker trying to pivot into streaming, a familiar story for competitors like Disney or Comcast. While its legacy networks include CBS, Nickelodeon, MTV, and Comedy Central, Paramount+ is what gets most investors' attention.
However, Paramount's arguably most popular television show, Yellowstone, isn't available on its streaming service -- you have to go to competitor Peacock (owned by Comcast) to view it. Still, prequels like 1883 or the upcoming 1923 can be watched on Paramount+.
As Paramount creates more content and licenses expire, look for Yellowstone and other Paramount-created content to return to its own streaming service.
NASDAQ: PARA
Key Data Points
On the live-sports side of the business, CBS recently inked a deal with the NFL to stream its games through the Paramount+ platform through 2033. As other streaming services (such as Amazon Prime) make their way into the sports world, this part of the business must maintain its long-established foothold. Securing a 10-year deal is just one step, but it seems to be on the right foot.
Top Gun: Maverick was easily Paramount's biggest hit this year at the box office, barely losing out to Avatar: The Way of Water for the highest-grossing movie in 2022. Look for Paramount to capitalize on this film through a Paramount+ series or a sequel.
While these news headlines paint a rosy stock picture, the company's financials could use a lot of work.
The dividend could be in danger
In the third quarter, Paramount's revenue rose 5% to $6.9 billion, with direct-to-consumer (38% growth) and filmed entertainment (48% growth) leading the way. Unfortunately, these two segments combined only make up 29% of the company, leaving the shrinking TV media segment (72% of revenue) to heavily influence its overall revenue trend.
As another knock against Paramount, operating income fell 36% to $566 million. This caused earnings per share (EPS) to tumble 70% to just $0.21, echoing the trend of the past nine months, during which EPS has fallen 64%.
So is this the beginning of the end for Paramount? Not really, but Wall Street analysts think it will take a couple of years for Paramount's earnings to rise again.
| Year | Average EPS Forecast |
|---|---|
| 2022 | $1.92 |
| 2023 | $1.19 |
| 2024 | $1.76 |
| 2025 | $2.69 |
Source: Nasdaq.
The low earnings outlook is primarily why Paramount's price-to-earnings (P/E) ratio looks so cheap.
PARA PE ratio; data by YCharts.
Because of the grim 2023 outlook, Paramount's forward P/E looks reasonable, even if its trailing one looks undervalued.
Another item to watch is the dividend. Over each of the past 13 quarters, it has paid $0.24 per share. However, with the third quarter's EPS of only $0.21, Paramount might have to cut the dividend if it cannot turn its business around in time.
So, should you invest in Paramount? I'd say no. The playing field is full of able competitors, and the company's financials aren't solid. At this time, it is a turnaround investment, which could turn out great or flop. While the dividend might be the investment's saving grace, I cannot say it is safe, especially with the company producing negative free cash flow in 2022.
There are better investments out there, and investors can do better than Paramount stock.
