Credit Suisse had an interesting report earlier this week about the radio industry that has broader implications. The thesis was that radio operators should establish signficant quarterly dividends as the best use of still substantial, if no longer growing, free cash flow. Dividends were preferred relative to share repurchases or just holding cash.
Among the reasons that Credit Suisse believes that dividends are the best use of radio industry free cash flow is that (1) it is a mature industry similar to others that offer high dividends, (2) there is empirical evidence that dividend paying stocks perform better, and (3) as baby boomers age and begin to shift toward more conservative asset allocations, the attractiveness of high dividend paying stocks will increase.
But most interesting is that Credit Suisse believes that high annual dividends will prevent “overinvestment” in the radio business….

Radio is a no growth industry facing secular competitive challenges that undercut the base business model. Reinvestment opportunities are limited and arguably just make the situation worse by raising the expense structure, dampening margins, and possibly undercutting product/advertising pricing. Unlike, say telecom services there is no imperative to reinvest to protect market share. There is nothing radio can do in its base business similar to replacing copper with fiber, for example.
Radio is not the only mature industry with limited growth prospects and secular challenges. Yet, it is not very often that you see industry observers, including insiders such as management, analysts, and bankers, acknowledge that further investment is not a good idea. Why throw good money away, money belonging to shareholders, instead of returning it in a fashion that reinforces long-term capital discipline? A fairly high quarterly dividend prioritizes capital allocation over the long-term, something that a share repurchase or leveraged recapitalization does not.