In the past five years, Twenty-First Century Fox’s (FOXA, Financial) stock price has experienced some volatility. In August 2011, it was only $14.70 per share. After that, it kept climbing to nearly $39 per share by the end of 2014. Fox traded for $24.65 per share Monday morning. With the market capitalization of $47.44 billion, should investors buy Fox at the current price? Let’s take a deeper look.
High insider ownership
What I like about Fox is its insiders’ ownership and their capabilities. It is currently under the leadership of the media guru, Rupert Murdoch. He currently owns up to 38.9% of the total voting stock. Its family trust, Murdoch Family Trust, owns 38.4% of the total voting stock, while billionaire Prince Alwaleed Bin Talal Alsaud has 6.6% of the company. Activist investor Jeff Ubben’s ValueAct has another 5.9% because he sees the opportunity to increase value in the company.
Indeed, Fox, with high insider ownership, has returned a significant amount of money to shareholders. In 2015, around $6.8 billion was given back to shareholders in the form of share repurchases and dividends, bringing the total capital returned to shareholders up to $14 billion. In 2015, while Fox’s revenue declined by 9% to nearly $29 billion, its income from continuing operations surged tremendously, from $3.9 billion to $8.6 billion. It was mainly because of the disposition of DBS business.
But high level of leverage and free cash flow multiple
What worries me about Fox is the high level of leverage. It employed around $20 billion in debt; most are in the range of high weighted average interest rate. Its predecessor indentures are $10.78 billion outstanding, with the interest rate of 7.14% while senior notes issued under August 2009 indentures are $6.7 billion with the interest rate of 4.95%. With $5.83 billion in cash, its enterprise value is now $61.6 billion. However, Fox has been able to generate positive free cash flow consistently. The average free cash flow that Fox has generated is $2.26 billion. Thus, its EV/Free Cash flow seems to be quite high, at 27.25x. Fox has always been valued at a high free cash flow valuation, ranging from 19.36x to as high as nearly 52x in the past five years. Thus, relatively, this current valuation doesn’t seem to be excessively expensive.
Return high amount of cash to shareholders
At the current price, Fox’s dividend yield is only 1.20%, much lower than Disney’s (DIS, Financial) dividend yield of 1.51%. Time Warner (TWX, Financial) gives its shareholders the highest dividend yield among the three, at more than 2%.
However, Fox also returns cash to shareholders via share buybacks. Lachlan Keith Murdoch, co-chairman of Twenty-First Century Fox, commented that, by the end of fiscal 2016, via both share buybacks and dividend payments, the company plans to return more than $24 billion to its shareholders over a five-year period, representing nearly 200% of free cash flow over the same period.
Indeed, in the long run, Fox could benefit from the rising trend of global pay television market. There is an increasing worldly demand for premium content and retransmission revenue, which also benefits the company. Its long-term shareholders could be rewarded with the growing dividend payments and aggressive share repurchases in the future. ValueAct has suggested that Fox’s share price could reach $50 per share in the next 2½ years.
