News Corp: Result 2015

There were five main surprises in News Corporation's 2015 final result – all of them positive. With reporting season resembling a horror movie thus far, we would have been happy with just one.

First up, News Corp announced it would commence paying dividends, making a mockery of our statement from the last review that the company 'doesn't pay any'. Let's revise that to 'doesn't pay much', because Rupert Murdoch is something of a scrooge when it comes to dividends.

The company will pay dividends on both the voting (ASX code: NWS) and non-voting shares (ASX code: NWSLV) at the rate of US$0.10 per share semi-annually (the first ex date is 14 Sep). Don't blow it all at once.

The second positive – and perhaps more important – surprise was a better than expected performance from the News and Information Services (NIS) division. You'll remember from The not-so-bad News from 27 Jul 15 (Buy – $19.84) that this division's earnings should be expected to decline over time.

But the benefits of restructuring initiatives meant fourth quarter earnings before interest, tax, depreciation and amortisation (EBITDA) actually increased 29%. For the year, NIS's EBITDA fell 9% to US$603m, much better than forecast.

Foxtel surprise

The third big positive surprise was Foxtel (of which News owns 50%). Foxtel's EBITDA in Australian dollars fell 8% to $900m due to new pricing packages and higher costs, although that translates to a 16% decline in US dollar terms. However it was the 2016 outlook that surprised.

We were forecasting that increasing competition from video on demand services such as Netflix – which already has more than 700,000 subscribers – would see earnings decline by perhaps 15% in 2016. Instead management suggested Foxtel's earnings will increase this financial year.

Surprise number four was digital education business Amplify. Proving that Murdoch knows when to hold 'em and knows when to fold 'em, management effectively admitted Amplify is a dud. As well as taking a $371m writedown, the company announced it is in advanced negotiations to sell the division. The sale – should it occur – will remove Amplify's losses from News Corp's accounts.

Number five is that last year's acquisition of Move is exceeding all expectations. News has been using its mastheads to drive traffic to the realtor.com site, as expected. Unique users were up 43% in July, shifting realtor.com from the number three real estate website in the USA to number two. We were expecting Move might make losses for a few years based on a difficult turnaround, but management expects it to be modestly profitable at the EBITDA line in 2016.

Weak link

Perhaps the weakest link in the result was Book Publishing, although only compared to high expectations. A flat fourth quarter resulted in annual EBITDA rising by just 12% to $221m. It looks a little like 2015 was a particularly strong year, so earnings might decline this financial year.

Adding it all up, revenues rose 1% to US$8.6bn while underlying EBITDA rose 11% to US$852m. Earnings per share, excluding unusual items, were flat at US$0.47. Free cash flow, a more useful number than earnings for News Corp, was US$368m for the year.

Generally we suggest you focus on long-term movements in divisional profit rather than aggregate numbers. Table 1 shows News Corp's earnings performance by division. Remember these figures are in US dollars, so they won't match up to the sum-of-the-parts table provided in The not-so-bad News (which were normalised and then converted into Australian dollars, but we'll stick to US dollars in future for consistency's sake).

Overall, it was a pleasing result that helps confirm the recent recommendation upgrade. Cash on the balance sheet of US$2bn provides the company with plenty of flexibility for investment into existing businesses, or to use acquiring assets likely to perform better under News Corp's ownership (such as Move).

While the story continues to improve, the stock remains slightly below our recent upgrade price. The recommendation remains BUY.

Disclosure: Staff members own shares in News Corp but not the author.