The Takeover Candidate That Got Away

For income investors, takeovers can be bittersweet. Sure, you may be collecting a fat premium from the acquirer, but you’re also losing a reliable dividend payer.

Still, the prospect of such short-term windfalls can be enticing. And when you get it right, it’s a strong validation of your investment process. That feels nice too.

Over the past two years at Utility Forecaster, we’ve successfully picked a handful of stocks that went on to be acquired shortly after we first recommended them: ITC Holdings Corp., Columbia Pipeline Group, Columbia Pipeline Partners LP, Questar Corp., and WGL Holdings Inc. (NYSE: WGL), whose takeover is still pending.

But while we certainly explore a company’s takeover potential as part of our analysis, it’s never central to our rationale for making a recommendation. That’s because we don’t want to risk getting stuck holding a mediocre stock that never finds a suitor.

Instead, we look for fundamentally superior companies that offer long-term earnings and dividend growth and are trading at a reasonable price. If an acquirer happens to come along later, well then that’s just gravy.

Occasionally, such discipline means we miss out on opportunities.

In late May, while searching for new recommendations for Utility Forecaster, we spent most of a day kicking the tires on Scripps Networks Interactive Inc. (NSDQ: SNI). The media company had suffered a steep slide from its trailing-year high and also happened to be one of the few in its industry that pays a dividend.

Among other factors, the selloff was prompted by the market’s recognition that cable players such as Scripps, which owns HGTV and the Food Network, risk losing market share as cord-cutting and “skinny bundles” of cable channels gain traction.

The Revolution Will Be Streamed

As the Internet plus wireless upends the old cable business model by offering an endless supply of video on demand wherever you are, the days of 200-plus cable channels are rapidly coming to an end. So companies like Scripps are hustling to ensure that their content scores a coveted spot on the slimmed-down premium media packages now being offered to subscribers by cable companies and Internet streamers.

A year ago, we wrote that the revolution in American’s viewing habits would drive a new wave of consolidation among cable, media, and telecom players. As such, we’ve been looking for opportunities to capitalize on this trend without getting saddled with an also-ran.

To this end, Scripps has a number of compelling attributes, including strong free-cash flow generation that’s powered dividend growth of 20% annually over the past five years.

But even at its year-to-date low, Scripps’ stock yielded just 1.8% on a forward basis.

Meanwhile, the energy sector had been selling off, giving us a chance to lock in yields of as much as 6.4% on some of the more conservative MLPs that we’ve had on our wish list for a while.

So we opted to focus on these midstream plays instead, while adding Scripps to our wish list to see if we could pick it up at an even lower price later this year.

But before we got a chance to pull the trigger, rumors began to emerge this week that fellow cable player Discovery Communications Inc. (NSDQ: DISCA) is poised to make a bid for Scripps—and the stock shot up nearly 18%. It really hurt to miss this one!

At the same time, we don’t regret staying disciplined—or focusing on opportunities with much higher yields. We think our subscribers are ultimately better served this way.

That’s why for those income investors who want the best of both worlds—fundamentally superior utilities with attractive yields and takeover potential—we have a special report where we’ve identified nine high-quality takeover targets.

Of course, it’s only available to Utility Forecaster subscribers.