Please ensure Javascript is enabled for purposes of website accessibility

Is United Online for Real?

By Nate Parmelee – Updated Nov 16, 2016 at 12:47PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A very large yield makes this company intriguing as an investment.

For investors interested in dividends, United Online (NASDAQ:UNTD) has been popping up on screens of late because of its large yield. As of today's earnings release and subsequent jump in price, the shares still yield a beefy 6.35%.

The premise for investing in United Online is that the company's dial-up Internet business will remain viable longer than expected. The free cash flow generated from the dial-up business will allow the company to fund its large dividend, pay down its remaining debt, and diversify its business by adding other subscription services, such as its classmates.com and a photo-sharing business. So far, it's pretty logical.

The current quarterly numbers, for the most part, bear that out -- revenues were up 19%. Net income and earnings per share were down versus last year due to larger tax expenses. Strip out the tax charge, and the earnings were flat. Overall, the company's online access business is losing subscribers, but its NetZero division continues to add customers -- a fact I'm sure Time Warner's (NYSE:TWX) AOL division isn't overlooking.

For investors interested in the yield -- and I would guess that most are -- I would recommend focusing on the cash flow statement more than on the income statement, and I would completely ignore the company's OIBDA (operating income before depreciation and amortization) figures, because they ignore the cost of capital expenditures, acquisitions, and taxes.

Walking down the cash flow statement, immediately I see that United Online is grouping its stock compensation expenses in with its depreciation and amortization expenses. This is not something I like to see, because the stock compensation expense is a different beast than depreciation and amortization, which are offset by capital expenditures in a free cash flow calculation. The most basic free cash flow calculation is operating income minus capital expenditures, but I also recommend that investors always subtract any benefits claimed by stock compensation expense from operating earnings.

In this quarter's report -- and I haven't looked at others -- the company provides a breakout of the depreciation, amortization, and stock compensation expenses elsewhere in its release. I recommend adding back the stock compensation expense to get a more accurate view of free cash flow, because that compensation expense will be paid by shareholders in the future. Doing this yields an operating cash flow of $37.8 million for the quarter, instead of the reported $40.7 million, and free cash flow of $32.8 million, instead of $35.7 million.

This adjustment still leaves the company with room to fund its $12.6 million dividend payment for the quarter, its debt repayments, and its capital expenditures -- and still have a little more than $14 million left. Glancing at the previous four quarters' yields, I see similar results.

But I do have concerns about United Online's dilution and its effect on dividends, as well as how committed the company is to maintaining and increasing its dividend. The other concern, and a topic for another day or another site, is the company's VoIP plans. The competition in this arena is not small, and Skype is already a strong brand name with a solid free product in this space. For these reasons, I'll take a pass for now.

For related dial-up Foolishness, click on:

Interested in companies that have a proven history of paying and increasing their dividends? Consider a free 30-day trial to Motley Fool Income Investor . If you're not satisfied we'll give you your money back. No questions asked.

Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Time Warner Inc. Stock Quote
Time Warner Inc.
TWX

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.