The historical dividend per share chart for The New York Times is horrible.
But if we zoom into the last 5 years, it gets interesting.
That’s an 11.8% CAGR. The last few years highlight a structural business shift. This strategy change is why I’m adding The New York Times to our watchlist as a special situation investment. If they’re successful with the shift the New York Times could become a dividend stalwart.
Business Change & Growth
The structural shift started after the publishing of their internal 2014 Innovation Report. At the risk of oversimplifying, the shift is to push the New York Times towards a digital-first subscription company that coordinates content, social media promotion, and analytics to drive engagement and subscriber growth. The New York Times already figured out the hard part, producing award-winning journalism. Now they need to get that content in front of more people.
The beauty of a digital-first subscription model is they need less capital to maintain and grow the business. Returns on invested capital should grow over time generating excess capital that can be returned to shareholders. Since 2014, The New York Times has grown its ROIC from low single digits to a recent high of 15%.
Retention Rates & Lifetime Value
The key ratios for a subscription business are retention rate, customer acquisition costs, and lifetime value. The retention rate influences the lifetime value of a subscriber. The higher the retention rate, the higher the lifetime value of a subscriber. One strategy to increase retention rates is to bundle subscriptions together. The acquisition of The Athletic gives the New York Times another subscription service to enhance its bundles.
The New York Times is a national paper, but its sports coverage is local. The Athletic gives it a broader national reach. The issue is subscribers to the Athletic churn at a higher rate. Each sport has its own season. If you’re interested in Football, you’ll stop your subscription after the Super Bowl and then re-up at the start of the next season.
The New York Times is seeking to curtail that churn and increase the ARPU for Athletic subscribers. The strategy is to bundle subscriptions to The Athletic with subscriptions to the New York Times, its games subscriptions, or its cooking and lifestyle subscriptions. This same strategy can be applied across all its properties to increase retention rates and subscriber lifetime value.
Expect The New York Times to continue buying subscription properties.
Leveraging Star Journalists
Another potential avenue of growth is leveraging their stable of high-quality journalists. They can create a hub and spoke model as outlined by Alex Lieberman on the Business Breakdown Podcast.
And I think something that the Times really hasn’t capitalized on is truly making some of its top journalists and other creators at kind of the center of the brand. Thinking of New York Times in this hub and spoke model, where the Times brand is the hub, its spokes are individuals that people have really deep resonance with, monetizing those individuals in really clever ways and making sure everyone who follows these individuals also know that these individuals are part of a greater hold that is the New York Times. I think there’s an amazing opportunity to do that. And I think there’s an opportunity to do that specifically starting with their new newsletter business. They have 70 newsletters, they have 28 million subscribers, 17 million of which are just on their daily newsletter, The Morning, very convenient title, not commenting on that. But I think the ability to start with newsletters as a great way to build individual personal brand resonance is something they should double down on.
No Switching Costs
My biggest concern is the lack of a business moat. The Times has won the most Pulitzer Prizes because they have the best journalists. They have the best journalists because they can pay them more. They can pay them more because they have a large subscriber base. They have a large subscriber base because of their high-quality articles. It’s a virtuous cycle and some may call it a flywheel but it’s fragile. Nothing prevents a subscriber from canceling. There are no switching costs. This is why the New York Times has such a Byzantine cancellation process. You must call during specific times and talk to a person to cancel your subscription. You can use their chat service, but it’s always overloaded and unusable. The entire cancellation process is so bad that it sparked a class-action lawsuit.
I also can’t discern the long-term secular growth trend. There is the shift away from physical papers to digital and the structural change from ad-supported internet traffic to subscriptions. But that is a short-term change, not a long-term secular growth trend. Not every investment we make must have a unique secular growth trend. Growing along with the overall U.S. and global economy can be enough of a trend to justify our fair value estimate and an investment.
The New York Times is overestimating its target market and potential subscribers. Their TAM includes all potential consumers of news across both political parties. Even though the New York Times was co-founded by a Republican party founder, the paper is viewed as too liberal on the right and too moderate on the far left. Most voters exist somewhere in the middle but that doesn’t mean the New York Times is the paper of record for them. There are too many other media properties and personalities fighting for their attention.
I’m interested in the continued development of the New York Times’s shift to a subscription-only business. But my concerns outweigh the positive trends we’ve seen so far and it’s why The New York Times will remain on our watchlist.