Camarillo, California-based radio broadcasting company Salem Communications Corp (NASDAQ:SALM) recently made two distinct announcements that could dramatically alter investors’ perceptions of the company. For starters, Salem indicated that it would increase its quarterly dividend payments by a whopping 43 percent and reward its shareholders with a full $.05 per quarter.
At the same time, the company has also made definitive plans to refinance more than $200 million in outstanding long-term debt by issuing a massive tender offer. Taken together, these moves provide clear evidence that Salem’s cash flow situation has improved in a sustainable fashion. Although the company’s stock has already reacted favorably to these announcements, it may yet have more room to run. Investors who believe in Salem’s long-term viability as an independent niche broadcaster would do well to look at the company at these levels.
About Salem Communications
Salem Communications is a broadcasting company that operates in several major metropolitan markets across the United States. It primarily provides niche broadcasting services for Christian-focused talk and music programs as well as politically conservative talk radio personalities. However, it is important to note that it shies away from the bombast of many of the more recognizable political radio performers and caters its programming towards a younger, more explicitly religious audience. It also operates a number of online media properties, including GodVine.com, GodTube.com, BibleStudyTools.com and Jesus.org. It also publishes some print magazines and journals for a similar audience. These include Townhall Magazine, Youthworker Magazine and Preaching Magazine. Salem earned $4.5 million on $229.2 million in gross 2012 revenues.
Salem Communications Corp (NASDAQ:SALM)’s two closest competitors are the privately held CBS Radio and Clear Channel Communications. However, the company does compete directly with several publicly traded print and online media companies, including Time Warner Inc (NYSE:TWX) and CBS Broadcasting (CBS). Time Warner Inc (NYSE:TWX) dwarfs Salem Communications Corp (NASDAQ:SALM) in many ways. Time Warner has $28 billion in sales vs. Salem’s $229 million. Even Time Warner’s margins are greater than Salem’s. In a sign of the changing print media environment, Time Warner Inc (NYSE:TWX) recently announced its decision to spin off the bulk of its magazine properties. The company appears poised to focus exclusively on its broadcast and online media segments. Although it does not have a significant radio broadcasting presence, any move that Time Warner Inc (NYSE:TWX) makes could have ripple effects for the much-smaller Salem.
Meanwhile, News Corp (NASDAQ:NWS)‘s soon-to-be spun-off Fox Broadcasting sister corporation could make life difficult for Salem as well. Of the major media companies, Fox is by far the most conservative and offers many programming options that compete directly with those offered by Salem Communications Corp (NASDAQ:SALM). While it seems clear that the political media ecosystem is large enough to absorb such competition, it is worth noting that Salem’s position within the religious-media niche is not assured. With News Corp’s $7.8 billion in cash, it could easily takeover its much smaller competitor. News Corp has margins lower than Time Warner but still larger than Salem.
During its full-year 2012 report, Salem announced that it would buy back about $212.3 million in outstanding debt that was scheduled to become callable in December of 2013. Since the debt carried an interest rate of 9.63 percent, this will free up a significant amount of capital for the company to finance its other recently announced move. It is worth noting that Salem will pay a premium of roughly 6 percent for this debt: Whereas it would have called the debt for about 104 percent of par value in December, it has offered current holders over 110 percent of par value for the duration of the current tender offer.
Salem Communications Corp (NASDAQ:SALM) has also announced that it will boost its per-share dividend by 1.5 cents to 5 cents per quarter. This change will go into effect in the current quarter and reward shareholders of record as of March 25.
What May Happen Next
These two moves look likely to provide ample support for Salem’s share price in the coming months. Since the twin announcements, Salem has already jumped by more than 11 percent and now sits at a five-year high. With virtually no short-term resistance points, the company’s stock is primed to explode even higher. While it is difficult to quantify the magnitude of the move that the company stands to make, investors are clearly happy with the company’s improved performance. Over the coming quarter, a further rise of 25 percent would not be out of the question.
Long-Term Industry Outlook
Despite operating in a competitive industry, Salem Communications Corp (NASDAQ:SALM) looks well-positioned to deliver long-term value for its shareholders. Its religious, conservative niche has grown substantially during the past decade and continues to increase in size. By focusing on religious programming as well as explicitly political commentary, Salem looks likely to avoid the stigma that some fans of “serious” journalism have attached to News Corporation and others in the political-entertainment business. While the company’s ideological viewpoint will ensure that its audience remains somewhat self-limiting, it goes without saying that its minuscule $183 million market cap is indicative of tremendous promise. In other words, future growth is all but assured.
In this light, Salem Communications looks like a strong buy. It has recently increased its dividend and looks poised to refinance its long-term debt in an effort to increase its cash flow. In fact, investors who buy into Salem Communications Corp (NASDAQ:SALM) at these levels may be setting themselves up for exciting medium-term gains.
The article Broadcasting Company Looking Attractive After Refinancing originally appeared on Fool.com and is written by Mike Thiessen.
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