One of the more difficult parts of successful investing is admitting you are wrong. It happens to all investors, and those who read Berkshire Hathaway's shareholder letters will often see Warren Buffett admit mistakes.
The next admission may be a stock he currently owns called Paramount Global (PARA -3.94%). Buffett, who holds over 14% of its outstanding shares, regarded the company's dividend cut as "not good news" at his recent shareholder meeting. That is not necessarily a full admission one is wrong, but it increases the likelihood that Buffett's company will either reduce or exit its Paramount position.
No matter what Buffett decides, it also may be a good time for average investors to turn negative on the stock. Here's why.
The dividend cut
Although I never thought Paramount was perfect or suitable for everyone, I admittedly thought dividend investors should have a position in their portfolios. The company paid shareholders a $0.24 per-share quarterly payout ($0.96 per share annually), a dividend yield of 5.8%.
Some might see this as dangerously high given the 1.7% average dividend yield for the S&P 500 index and the fact that a company can adjust dividend payments at any time. Still, dividend cuts can undermine confidence in a stock, and since the last payout reduction came during the 2008 to 2009 financial crisis, I did not see such a reduction as likely in the current environment.
However, the company has slashed the quarterly payout to $0.05 per share ($0.20 per share annually). This reverses all dividend increases over the last 12 years. It also reduces the cash yield to just 1.2%, making it no longer competitive with interest rates one can earn at a bank.
Paramount's other challenges
The dividend cut may also lead to questions about other parts of the business. Previously, investors could also justify owning Paramount stock from a business perspective as the streaming part of the business has increased revenue at a rapid clip.
Indeed, this is still the case as the direct-to-consumer segment, which includes its streaming service, grew revenue by 39% year over year. Also, Paramount added over 4 million subscribers in Q1 alone, taking the total count above 60 million.
Nonetheless, its dominant TV media continues to experience revenue declines amid a slow transition from traditional television to streaming. Consequently, total revenue of $7.2 billion was down 1% from year-ago levels, and net losses came in at over $1.1 billion versus a profit of $433 million 12 months ago.This was due to programming charges of nearly $1.7 billion from abandonment of specific projects and impairment charges related to content removed from its platforms.
Moreover, the stock continues to struggle. The latest report prompted a stock sell-off, and the shares are now down 40% over the last 12 months. Among Paramount's challenges is competition, as consumers can now choose from thousands of streaming platforms. And with Paramount+ subscriptions as low as $4.99 per month, streaming is not a huge revenue driver.
Furthermore, the loss leaves Paramount stock without a current price-to-earnings (P/E) ratio, but its forward P/E ratio of 23 is only slightly below the 25 forward-earnings multiple of Netflix and Walt Disney's forward P/E ratio of 30. Considering that Comcast offers a forward-earnings multiple of 11 and a dividend yield of 2.9%, it might have become the media stock of choice for dividend investors.
Avoid Paramount Global
In light of the dividend cut, I have changed my stance on Paramount stock to a sell. Indeed, Paramount+ continues to attract significant subscriber growth.
However, with the dividend yield below that of the S&P 500 and its rival Comcast, the best reason to own Paramount is now gone. And even if it maintains the current pace of subscriber growth, streaming is a weak revenue driver replacing a dominant but declining TV media segment.
Ultimately, that dynamic does not lend itself to robust and long-term revenue growth, and the dividend cut may amount to Paramount's admission of this fact. Even though Buffett may still be betting on the streaming wars through this stock, investors should consider taking a hint from his latest comments and get out.
