When Warren Buffett's companies buy a new stock, many regular investors follow suit. Why shouldn't you walk in the footsteps of the investing genius who built Berkshire Hathaway into the massive conglomerate it is today?

Therefore, when Berkshire picked up 94 million shares of filmed entertainment studio Paramount Global (PARA 13.05%) (PARA.A 21.62%) over the last five quarters, many copied the idea or at least took a second look at Paramount's stock, albeit with a raised eyebrow or two. Buffett is not in the habit of explaining his investment theses in great detail, because Berkshire Hathaway isn't in the business of offering financial advice for free.

Why is Buffett even interested in Paramount?

And the Paramount pick didn't make a ton of sense at first. The company may be a household name, but it was never a true blue chip titan in a cash-cow industry with a business moat a mile wide, like the companies you'll normally see in Buffett's portfolio.

Start with Paramount's stagnant sales growth, unstable earnings, fading cash flows, and a plethora of respectable sector rivals. Then add in the company's heavy investment in the Paramount+ and Showtime video-streaming services, which don't match Berkshire's fairly tech-averse investing strategy.

Weird, right? Paramount's most obvious Buffett-coaxing quality in 2022 was its robust dividend policy with a yield around 3%.

So far, so good. But then Paramount decided to cut its quarterly dividend checks from $0.24 to $0.05 per share, effective with July's payout. The stock price is down more than 35% since that fateful announcement and for good reason. Even with the lower stock price, the dividend yield suddenly dwindled to 1.4%. If you can't rely on Paramount's dividends, why bother holding the stock at all?

Three reasons to own Paramount today

All hope is not lost. I see three solid reasons to stay optimistic about Paramount's long-term business prospects and investment value after the dividend cut.

  • Focus on cash profits: Paramount's management sees a "compelling growth opportunity" in digital streaming, but wants to set the company up for robust free cash flows while the streaming operation inches toward profitability. The payout cut will save about $500 million per year, helping Paramount reduce its debt balances in this unstable economy. The dividend drop is painful, but may set the company up to succeed in the long run.
  • Ultra-cheap shares: After a 2022 swoon and the dividend-based price drop, Paramount's stock is hanging out in Wall Street's bargain bin. The stock is changing hands at 0.3 times sales and 0.4 times Paramount's book value, in both cases well below the stock's five-year averages. These shares are also bargain-priced compared to industry rivals such as Walt Disney at 1.9 times sales or Warner Bros Discovery with a price-to-sales ratio of 0.7. If you're looking for a low-priced entertainment stock, Paramount could fit the bill.
  • Insiders are buying the stock: First, Berkshire Hathaway continued to buy Paramount shares in the first quarter of 2023. Then, in mid-May, non-executive chair Shari Redstone disclosed an open-market purchase of Paramount stock that increased her holdings by 40%. Berkshire is Paramount's largest shareholder with a 15% stake, and Redstone manages the company's long-term strategy. In other words, some of the people in prime positions to see where this train is going have indicated that they believe in Paramount's long-term investment value.

Is this the perfect time to buy Paramount stock, then?

I'm encouraged by the three positive details above, and Paramount's stock could work as a somewhat speculative turnaround play. The low share price reduces the risks involved. The tight attention to cash profits also shows that the management team keeps a sensible eye on long-term success, not quick fixes with limited value in the real world.

But you know what they say about the best-laid plans of mice and men. Even Buffett's interest can't quite convince me that Paramount is a no-brainer buy right now. If you left this company to be managed by a proverbial ham sandwich, Paramount would get eaten and forgotten in just a couple of years. The storied storyteller faces too many challenges to run on autopilot.

So if you decide to build a position in Paramount, you should make it a smaller-than-usual part of a well-diversified portfolio. There are better ideas available in this market, and some of my favorite ideas are entertainment stocks not named Paramount.