Telstra – not Nine – best media buy

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With the public float of the Nine Network looming, investors may be tempted to think about investing in a media stock. In the current climate, however, the first question should be not “which stock?” but, rather, “why?”

Many former traditional media stocks are struggling to find a new business model to make money from the internet; most appear to offer mainly speculative opportunities. On the other hand, the “new media” stocks – think REA, carsales and SEEK, which have boomed after monetising parts of the internet, are often selling on expensive PE ratios and offering low dividend yields.

Game changer

The reality of investing in media is that the speed of change and technical innovation makes it very difficult to be certain of the status quo. Think how quickly traditional (and apparently solid) media-like magazines, daily newspapers and now network television, have succumbed to internet-based competition.

Older media groups like News and Fairfax have had to write off billions of dollars of goodwill from their balance sheets. Recently Fairfax put its Tullamarine printing plant – described as “one of Melbourne’s over-capitalised properties” – up for sale. The land was bought in 1999 for $5.6 million and Fairfax added more than $220 million in the building and plant. It might get $20 million in the proposed sale.

And even the so-called new media have been casualties, as the fast-moving revolution rolls on: remember what happened with Rupert Murdoch’s ill-fated U.S. purchase, My Space. Things are happening so fast with the technology that, what today seems like a fashion, tomorrow becomes a short-lived fad.

This is an area for opportunistic investment by players who understand the field, rather than a place for serious, longer-term investment funds seeking assured income.

The reality is that the internet has changed everything by offering free connection to the world, dispensing with expensive printing presses and distribution systems. These costs and the wages of journalists were paid for with advertising revenue, which the internet has stripped away from traditional print media. It’s hard to build a business model to extract money from people who are now used to getting most of their information for free.

This reality won’t stop the Nine group’s private equity owners offering shares in the re-engineered Nine Network, based largely, it seems, on improvements in investment markets. Investors can, of course, make up their own minds when they read the prospectus, but a rule of thumb is to be sceptical when private equity investors are the vendors.

Buy the medium

For SMSF investors who see some promise in media and want diversification – but also some income – the pickings are slim. Among former traditional print media stocks, Fairfax shares are struggling at around 55c to yield around 3.7%, while shedding print products and concentrating on digital. The APN group does not have a yield and News, though with a more diverse, global spread (and a strong 2013 share performer) offers a yield of only 0.8% to compensate for exposure to a much more volatile, family-controlled group.

Perhaps one potential media stock is hidden in plain sight – Telstra. Remember Marshall McLuhan’s famous adage “the medium is the message”. This was framed in the 1970s when the mediums were print, radio, television and the telephone. No one guessed at the arrival of the internet, which in three decades has become the over-powering medium.

Perhaps, rather than chase possible ephemeral providers of content, investors may be better to invest in Telstra, the listed provider of the major medium supplying most Australian households. Its copper wire network is still central to the NBN project (with a longer life than Fairfax’s Tullamarine printing plant) and Telstra has a strong position in wireless and a key stake in the Foxtel cable network. All this and a dividend yield of 5.6%.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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