Warren Buffett's company Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) owned 94 million shares of media conglomerate Paramount Global (PARA -0.47%) as of last report -- worth $1.4 billion as of this writing. It's a small amount for Buffett, but not insignificant, especially given that Paramount stock is down nearly 50% in the last year after an ugly first quarter 2023 earnings update. The company slashed its quarterly dividend by 80% (from $0.24 a share down to just $0.05) as it tries to shore up its profitability amid a nasty TV streaming battle.
Buffett of course said a dividend cut is always a bad thing. But there's far more to the story that should have investors concerned about Paramount Global's health as a viable investment.
Why dividend cuts matter
Buffett did say that "it's not good news when any company...cuts its dividend dramatically." Of course, he wasn't going to give the reasons why it's bad for Paramount away for free, because Buffett and company "are not in the business of giving stock advice to people." So, in the business of stock opinions, I guess that's why I'm here.
Dividend cuts are a bad situation because it's an admission that a company isn't generating enough cash anymore. All businesses go through cycles in which profits may temporarily dip. In these situations, if a company thinks it has a solid long-term business model, it can continue paying a dividend by using cash it has stashed away on the balance sheet until the business environment improves.
But times change, and a once-solid business model may no longer have the same ability to sustainably crank out cash to shareholders like in times past. Since stock investors are the last in line to get paid (after a company's basic bills are covered, next the owners of debt need to be paid back with interest, and finally equity investors get the leftovers), a steep dividend cut like the one Paramount just announced indicates times have indeed changed -- perhaps permanently.
Taking a look at Paramount's trending financials from the last three years, it shouldn't have been a surprise that a dividend cut was coming.
Data by YCharts.
What's eating Paramount's media empire?
Of course, after stating he wasn't going to give away free advice, Buffett did opine on the troubles Paramount -- and all streaming TV companies -- are facing going forward. I'll sum up the response in three primary points, with some color commentary of my own added:
1. Fewer companies and higher prices
TV streaming is a brand new business model. Like any new venture, it takes time to scale up and start turning a profit. In the interim, TV streaming is costing media companies a fortune -- especially traditional media companies like Paramount (more on that in a moment).
Complicating matters further, there are a ton of companies that have entered the TV streaming industry. In Buffett's estimation, this makes it difficult to grow an audience, the "eyeballs" watching your service from which money is made via a subscription and/or advertising dollars. Simultaneously, with a battle raging among TV streamers for those eyeballs, this makes it difficult for a company like Paramount to simply increase the subscription price. Hike prices too much, and subscribers will simply unsubscribe and go elsewhere.
In short, Buffett thinks the TV streaming market needs fewer companies so that price increases can start to take effect and for eyeballs to be efficiently monetized via ads. Until that happens, companies like Paramount will struggle to turn a healthy profit (and thus struggle to pay healthy dividends).
2. Too much entertainment and too few eyeballs
This point on eyeballs leads to the second problem: There simply aren't enough eyeballs for the number of screens out there. To wit, Buffett mentioned the sharp decrease in theater attendance in the wake of the pandemic. Big-budget movies can still haul in massive profits, but the demand for more of these films from consumers has not rebounded to pre-pandemic box office ticket sales levels (at least not yet, the jury is still out if it ever will).
Simultaneously, cable TV has been in long and slow decline as households cut ties with the expensive and long-contract model of yesteryear. Streaming TV is great for the consumer, but media businesses are losing the high-profit-margin and predictable cash flow cable TV model they've been able to rely on for decades.
Meanwhile, those eyeballs are migrating to streaming. However, it's a costly move for media shareholders. Paramount's direct-to-consumer segment (Paramount+, PlutoTV, etc.) reported a 39% year-over-year increase in revenue to $1.51 billion, but operating income before depreciation and amortization (OIBDA, Paramount's preferred operating metric that's a modified version of EBITDA) losses steepened to $511 million (worse than the OIBDA loss of $456 million in Q1 last year).
In other words, more streaming revenue at a steep loss, and less highly profitable revenue from cable TV and movie theaters.
3. The talent always gets paid first
The other problem with the TV streaming market, at least up to this point, has been a supply and demand issue. To attract those eyeballs, Netflix (NFLX -3.92%) unleashed a tidal wave of its own content in the last decade to keep those eyeballs glued to their service. Media companies have begun to follow suit and are also in need of more content to make the case to would-be subscribers their service is the one to go with.
The problem is, according to Buffett, "the talent will make the money." There is only so much superstar acting and personality talent out there, and with increased demand for that limited talent, costs have gone up. Also, with limited supply of TV and movie production, costs to make a feature film or high-quality TV series have also increased in recent years.
This completes the ugly cycle traditional media businesses have been stuck in. Too much demand for talent and production is raising costs, which is why Buffett says there needs to be fewer streaming companies so that the economics of this new era of TV can be fixed.
Is hope lost for the media industry?
Paramount's dividend cut was a necessity as it struggles through what has become a prolonged war in the TV streaming market. But not all is lost. Paramount and its peers are getting serious about trimming losses. Paramount could even be a buyout target from a rival media company -- or a cash-rich big tech company that is further along in cracking the code to turning a consistent and healthy profit from internet-based TV.
But as for Paramount being a healthy long-term investment in this industry, the case against it is getting hard to ignore. Even Buffett sounds like he might regret the purchase of those 94 million shares.
