Torstar Corp. was downgraded to reduce from hold at TD Securities after its first-quarter results demonstrated that its core business is constantly on the languish and it made a $200-million investment in digital media company VerticalScope Holdings.
Analyst Bentley Cross noted that despite getting a 56-per-cent stake within the operator of online forums and internet sites such as AutoGuide.com, VerticalScope is expected to provided Torstar with limited or no near-term income.
He cut his price target on Torstar shares to $4.25 from $6.50, assuming the company will pay a dividend of 13 cents, one fourth of its current payout.
“Using the company\’s cash hoard now largely gone and free income trending near zero for this year, we believe that the board will cut the dividend,” Cross told clients, noting that his estimate suggests Torstar’s current dividend means a payout ratio of more than 700 per cent of this year\’s free income.
The analyst also pointed out that Torstar yields above 11 per cent, so the marketplace is already concerned about a dividend cut. However, he sees further weakness within the stock if a reduction does fall from the board.
“Admittedly, 2015 is expected to be a year of investment as the company launches its new Star Touch tablet application and the company faces cash commitments from the previously announced restructuring efforts; however, even if we look to 2016 and 2017, we still see the current dividend representing well more than FCF,” Cross said.