Newspaper Economics

Newspaper executives may be excited by the new business acquisitions, but Wall Street in 2005 remained unconvinced that they were enough. Or at least the industry had not yet made a persuasive case.

Hence its yearlong tumble, with most stocks down at least 15% and some 30% or more. And that was in a year when the S & P index was up 5%.

Those companies with a track record of re-deploying cash into big growth plays — like Scripps and the Washington Post — are relative favorites. (See chart for company-by-company performance). Nor have investors responded enthusiastically to cost-control initiatives like those at Tribune, the New York Times Company, and Knight Ridder. The market appeared to be looking for more in 2005 than frugality. Apparently it wanted vision, and some persuasive reason to believe the companies knew the strategy would work.

Newspaper Company Stock Values

2004 vs. 2005

Company	12/31/04	12/31/05	Percent Change	Two-Year Peak	Decline form Peak
Gannett	$82/share	$61/share	-25%	90 (4/04)	-33%
Tribune	42	30	-30%	53 (2/04)	-43%
Knight Ridder	67	63	-6%	80 (5/04)	-21%
New York Times	40	26	-35%	49 (2/04)	-47%
Dow Jones	43	35	-17%	52 (2/04)	-25%
E.W. Scripps	48	48	even	54 (5/04)	-11%
McClatchy	72	59	-18%	75 (4/05)	-21%
Washington Post	983	765	-22%	983 (1/05)	-22%
Lee	46	37	-20%	50 (6/04)	-26%
Journal	18	14	-22%	20 (3/04)	-30%
Journal Register	19	15	-20%	22 (3/04)	-32%
Media General	65	51	-22%	72 (2/04)	-30%
Belo	26	21	-19%	30 (4/04)	-30%
Sources: Yahoo finance, Merrill Lynch research. Stock values are rounded to whole dollars and percentage change calculated on that basis.

The publicly traded companies began 2005 with market capitalization (shares times stock price) of roughly $85 billion. They ended the year at roughly $15 billion less. What can help? Stabilizing circulation or an uptick in ad revenues would. Transformation — full integration of the multiple platforms and new businesses — would be even better. Realistically, though, that will play out over a period of years, not just in 2006.

The companies do have financial moves available to appease shareholders in the meantime. A number have been buying back large quantities of their own stock, a device that improves earnings per share by reducing the number of shares traded.

Douglas Arthur of Morgan Stanley and other analysts have suggested that the companies could pay much higher dividends, returning a bigger chunk of cash flow to investors in that way. Dividends went out of fashion in the go-go 90s, but have been coming back lately. That could make newspapers attractive to income-oriented investors like the coming wave of baby-boomer retirees. While several newspaper companies have increased their small dividends modestly, none have yet plunged in that direction.26