ViacomCBS Is A Buy

The Market Likes What It Sees

If you had looked at the chart of ViacomCBS yesterday you would not have been impressed. The stock was trading off the recently set lows but not notably so and the indicators did not inspire bullish sentiment. Today, however, after the company reported its first-quarter earnings, the scenario is quite different.

ViacomCBS’s report was so good it sent shares skyrocketing more than 15%. Both the Class A (VIACA) voting shares and Class B (VIAC) non-voting shares are on the move although the wicked price discrepancy remains. VIACA is trading near the $19.85 mark in the early hours of the day while VIAC is closer to $17.50.

The discrepancy, long-attributed to Sumner Redstone’s involvement in the company, do little to dissuade me from interest but make the B shares a little less risky; there’s no premium associated with voting rights, a premium you don’t typically see in a Class A/Class B share arrangement.

The Pundits Were Wrong To Doubt The Power Of ViacomCBS

The pundits have, over the last month or so, begun to doubt the power of the ViacomCBS merger. I’ve seen more than one article suggesting dividend cuts could be on the way but the reality is much different. ViacomCBS is the nations leading supplier of televised entertainment. The merger created an entertainment powerhouse commanding 22% of T.V. viewership and the lion’s share of markets across demographics and categories. With over 140,000 episodes of television and 3,600 film titles in the fold, it is well-positioned to dominate in the at-home environment.

At the headline, ViacomCBS revenue fell -6.1% from the previous year, adjusted for the merger and other factors. The good news is that revenue came in above expectations, EPS beat by a wide margin, and sequential improvement in income, adjusted earnings, diluted EPS, cash flow, and free cash flow. Strength is being driven by at-home viewerships. The company reports significant growth in streaming, digital video, subscribers, and consumption proving the push to online was a smart one.

Bob Bakish, President & CEO

“ViacomCBS delivered solid results in our first full quarter, including sequential improvement on key financial metrics, as well as clear operating momentum. In the wake of the COVID-19 pandemic, we also took decisive action to fortify our balance sheet, protect our employees and help communities in need… Importantly, we are just beginning to tap into the potential of our combined assets, and our growing scale, audience reach, and earnings power will become even more apparent as the market rebounds and we put the power of our portfolio behind our streaming strategy.

It’s The Dividend That Caught My

ViacomCBS results, positioning, and outlook are all well and good but it was the dividend that really caught my eye. The dividend, supported by underlying company health, is large, safe, and healthy. At the close of Wednesday trading, the stock (VIAC) was paying 6.5% with a payout ratio near 25%. After today’s surge, the yield is closer to 3.75% but even safer than before. With today’s news, the outlook for 2020 and 2021 EPS is on the rise lowering the expected payout ratio and improving the odds of future increases.

The Technical Outlook Is … Bullish!

The technical outlook is bullish. After hitting the bottom and making an uncertain recovery today’s news has reinvigorated this market. ViacomCBS is emerging as a digital-entertainment giant that can compete with the likes of Netflix (NFLX), Amazon(AMZN), and Disney (DIS). Today’s move has price action moving back above the short-term moving average where I suspect buyers will be waiting. The risk is that support will not hold but I don’t see that happening. In the near-term, ViacomCBS may rally to the $19.00 level. Longer-term, the $19.00 level may provide resistance on the way back up to the $36-$40 region.