Game of Thrones is Time Warner’s Cash Cow

Stock Market

Time Warner (NYSE:TWX) climbed as much as 3.8 percent in early trading Wednesday after reporting second-quarter results that came in ahead of analyst expectations. Revenues increased 10 percent on the year to $7.4 billion, beating the average analyst estimate of $7.11 billion. Adjusted earnings increased 45 percent on the year to 83 cents per common diluted share, beating the average analyst estimate of 76 cents per share.

Revenue growth in the second quarter was driven by the company’s Film and TV Entertainment and Networks segments. Film and TV Entertainment, which accounted for about 39 percent of total revenues, increased its top line by 12.5 percent on the year.

The Networks segment, about 51 percent of total revenue, increased its top line by 6.7 percent. This more than offset a revenue decline of 2.3 percent in the company’s Publishing segment, which pretty much rounds out Time Warner’s revenue streams (there were some marginal losses in inter-segment eliminations).

Total adjusted operating income for the quarter increased 24.6 percent on the year to $1.5 billion. Operating income in the Networks segment, which accounts for about 80 percent of total income, increased 30 percent on the year to $1.2 billion. Income in the Film and TV Entertainment segment, about 12 percent of the total, increased 34 percent to $184 million. Income in the publishing segment increased 27 percent to $124 million.

The company made note of the fact that Game of Thrones viewership averaged 14.2 million per episode during the third season, a 20 percent increase over the second season and the second-highest viewership for HBO following The Sopranos. 

While chief competitors like Discovery Communications (NASDAQ:DISCA) and CBS (NYSE:CBS) shouldn’t be underestimated, Time Warner offers the most value, especially to the dividend investor. Time Warner has increased its dividend steadily throughout the past several years, even increasing its dividend during the financial crisis. The company reported with its second-quarter results that it had repurchased 32 million shares for $1.8 billion this year through August 2.

It now yields a best-in-class 1.9 percent, and with a payout ratio of 33 percent the company has room for future increases. If you want high growth you should be looking at Discovery, which has a projected growth estimate of 33.5 percent in the next year and the healthiest operating margin at 40.81 percent — but you will have to pay for it at a price-to-equity multiple of 32.55 versus Time Warner’s multiple of 18.74.

Trailing P/E 18.74 32.55 20.13
Growth Est. (2013) 12.20% 33.50% 19.20%
Dividend Yield 1.90% N/A 1.00%
TTM Operating Margin 22.77% 40.81% 21.80%

Looking ahead, Time Warner expects full-year adjusted earnings to increase by a percentage “in the mid-teens off a 2012 Adjusted EPS base of $3.24,” according to a company press release.

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