Almost a year ago, ViacomCBS (VIAC) stock collapsed to a 10-year low of $11 due to the coronavirus crisis. The market priced the stock for a disaster due to the impact of the pandemic on the advertising revenues and the movie business of the company. However, as ViacomCBS has exhibited fairly resilient business performance and has decent growth prospects ahead, its stock has nearly quintupled off its bottom.

It is also worth noting that ViacomCBS is a significant holding of Baupost Group, which is well-known for identifying undervalued stocks that have fallen out of favor in the investing community due to short-term headwinds. Nevertheless, due to the steep rally of the stock, investors should realize that most of the easy money has probably been made on the stock and hence they should wait for a more opportune entry point.

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Business overview

ViacomCBS is an American multinational media conglomerate based in New York City. It was formed in late 2019 with the merger of Viacom and CBS. ViacomCBS has been facing a strong headwind in its flagship businesses, such as MTV and Nickelodeon, which used to generate most of its revenues. Streaming providers, such as Netflix (NFLX), have become so popular that the traditional content providers like ViacomCBS have fallen out of favor.

Fortunately, ViacomCBS has begun to adjust to the streaming era, and as a result, investors now view the stock more favorably. In the most recent quarter, revenues decreased 9% and adjusted earnings per share fell 17% due to the impact of the pandemic on advertising revenues and theatrical revenue. However, ViacomCBS enjoyed 72% growth in the domestic subscriber count of its streaming business and 56% growth in its streaming and digital video revenues. Thanks to the strong momentum of this division, ViacomCBS is expected to report just a 15% decrease in its earnings per share in the full year 2020, with hopes for a return to growth in the future.

Growth

Despite the aforementioned secular headwind in its flagship business, ViacomCBS has grown earnings-per-share at a 16.1% average annual rate during the last decade. A significant portion of this growth was achieved thanks to aggressive share repurchases, as the company reduced its share count by 34% between 2011 and 2016. Nevertheless, the performance record is still noteworthy, particularly given the challenges that the flagship business faced.

Moreover, ViacomCBS has begun to adjust to the streaming era. Investors should not expect ViacomCBS to become as large as Netflix but still, the streaming business of ViacomCBS is likely to prove a significant growth driver in the upcoming years. Furthermore, now that Viacom and CBS have merged, the company is one of the most significant content producers and providers globally. This allows the company to be in a solid position as content demand continues to grow.

Overall, we expect ViacomCBS to grow its earnings per share at a 3.0% average annual rate over the next five years, from about $4.26 in 2020 to $4.94 in 2025.

Dividend

ViacomCBS froze its dividend in 2018 due to the merger of Viacom and CBS. As a result, it has raised its dividend for only two years in a row. In addition, due to its steep rally in recent months, the stock is currently offering just a 1.8% dividend yield. This is a fairly low yield.

ViacomCBS has a markedly low payout ratio of 23% and hence it could offer a much higher dividend to its shareholders. However, the company needs to invest significant amounts in its business in order to create new content and compete with its peers. Moreover, ViacomCBS has exhibited a preference for share repurchases instead of dividends when it chooses to boost its shareholder returns.

Valuation – Expected Return

ViacomCBS is currently trading at a price-to-earnings ratio of 12.2, which is lower than the historical average price-to-earnings ratio of 14.6 over the last decade. However, the stock has traded at an average price-to-earnings ratio of 12.0 in the last five years and we prefer to assume a fair price-to-earnings ratio of 10.0 for the stock due to the challenges it is facing. If the stock trades at our assumed fair valuation level in five years, it will incur a 3.9% annualized drag in its returns due to the contraction of its valuation level.

Given also the aforementioned 3.0% expected earnings-per-share growth and its 1.8% dividend yield, ViacomCBS is likely to offer just a 1.1% average annual total return over the next five years. In other words, most of the easy money has probably been made on the stock and hence investors should wait on the sidelines for a more attractive entry point.

Final thoughts

ViacomCBS has remained fairly resilient to the pandemic and has begun to adjust successfully to the streaming era. However, thanks to the enthusiasm of the market over its promising prospects, the stock has nearly quintupled off its bottom in March. As a result, the stock has become fully valued and therefore investors should wait for a meaningful correction before buying.