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Is the Washington Post Being Asset-Stripped?

While the company has been bleeding revenue and income in the last year-plus, it has actually been increasing the amount of cash it pays out in dividends.

(Photo: bikesandwich)

On April 27, 2012, I first wrote about possible insider trading and nepotism at The Washington Post, alleging that one way The Washington Post Company has been depleting the corporation of money and resources has been through dividend payouts and stock buybacks which benefit the Graham family.

On May 11, 2012, Ryan Chittum wrote a stunning piece supporting the same argument with respect to The Washington Post: “Dividends, share buybacks and an anti-paywall stance help bleed the paper dry.”

Chittum further stated:

“The company … has earned a total of $546 million since the start of 2008, when the financial crisis began in earnest. But in that same time, it has spent more than twice that – $1.1 billion – on buybacks and dividends that have helped put a floor under its share price (and its earnings per share).”

Much of that money is being squandered to appease the short-term interests and cash needs of shareholders, who very much include the Graham family, which controls the voting shares of the Post.

To read more articles by Danny Weil and other authors in the Public Intellectual Project, click here.

While the company has been bleeding revenue and income in the last year-plus, it has actually been increasing the amount of cash it pays out in dividends. Last year, it paid a $9.40 dividend for each share – a total cash payout of $75.5 million to shareholders. It has raised its dividend in nine of the last ten years for a total increase of 69 percent.

Chittum also noted:

“This is like some kind of recurring nightmare for iconic American newspaper brands. It was only five years ago that Audit Chief Dean Starkman wrote this about Dow Jones, The Wall Street Journal’s publisher, which was bled dry by decades of dividend demands from the feckless Bancroft family.”

The Bancroft family starved the Dow Jones from growing its business and eventually sold The Wall Street Journal to Ruppert Murdoch.

What Chittum failed to report is that between 2008 and 2011, while CEO Donald Graham was making $1.1 billion in dividend payments and stock buybacks, his family sold about $80 million in stock, benefiting from the increased share price resulting from the buybacks. Graham used Washington Post (WaPo ) money to pump up the stock price as his family cashed out, and new investors were purchasing WaPo stock at prices which had been inflated by the company. The most notable beneficiaries of this maneuver were the Graham family and Warren Buffet, who together control about 35-40 percent of all stock.

There is little recourse for shareholders due to the fact that The Washington Post Company has been arranged as a dual share class company for sale on the stock exchange. Even though the Graham family only owns about 15 percent of company stock, Donald Graham controls 85 percent of Class A shares – which elect 70 percent of the board of directors. This is the Class A shareholder’s trick and how the 1% avoids taxes and regulations and wards off threats to its internal rule.

Class B shareholders own about 85 percent of stock, but they only get to elect three board members. Buffet owns about 25 percent of Class B shares, but he has philanthropically turned over his voting rights for his shares to CEO Graham; therefore, Graham in effect controls the entire ten-member board and runs the publicly traded company as his own private fiefdom.

As sole controller of the board of directors, Graham has appointed himself chairman of the board and hired himself as CEO. The stock buybacks all serve to benefit Graham, his family – and philanthropist Buffet.

In some financial quarters, Graham has been issuing dividend payouts which actually exceeded the Post’s quarterly earnings. For example, Reuters reported on January 20, 2011, that The Washington Post Company was increasing dividends from $9.00 to $9.40 per share and paying a quarterly dividend of $2.35 per share, even though the earnings per share in the first quarter of 2011 were $1.87. See here.

In the case of the Bancrofts, it was dividends, which in some years exceeded the Dow Jones company’s profits – as with the Post – that convinced senior Bancroft family members to support Dow Jones management. In 2006, the company paid out $83.2 million in dividends, while earning $81.6 million in profits.

Meanwhile, as quarterly dividends have risen, Washington Post employment has fallen. Reuters reported on February 8, 2012, that The Washington Post was offering voluntary buyouts to newsroom staff. And on February 23, 2012, Reuters reported that the Post Company was issuing a quarterly dividend of $2.45 a share. See here.

Nepotism at the Post

Graham has also been engaging in active corporate nepotism. He appointed his niece and publisher of the newspaper, Katharine Weymouth, as one of the company’s directors. One of her first acts was to dive headfirst into the scandal known as Salongate: the Post was caught in 2009 advertising special WaPo “salons” about which a Washington Post flier advertised:

“For $25,000 to $250,000, The Washington Post is offering lobbyists and association executives off the record, non-confrontational access to ‘those powerful few’ – Obama administration officials, members of Congress and the paper’s own reporters and editors.”

Graham simply shrugged the whole Salongate incident off and turned around and appointed his daughter Laura O’Shaughnessy as CEO of the Post’s Social Code company.

Weymouth was criticized last year by Post employees when it was disclosed she made over $2 million in 2010.

Graham’s niece stands to gain even far more in the future if all goes well. According to an SEC filing made last week by the Post, Weymouth may receive as many as 42,500 shares in restricted stock awards by 2018 if she meets certain “business goals.” Given the current value of the stock, at $363.51 (when the market closed on July 25, 2012), this could be a whopping $15.4 million. No one has released any information as to what “performance goals” Weymouth must meet to receive the restricted stock shares. It’s a family affair.

What are Restricted Stock Shares?

Restricted stock awards are those in which stock is given outright to an employee, usually to an executive as compensation. Since stock options are no longer “free” on the balance sheet due to legal changes, restricted stock awards have become the substitute accounting darlings for executive pay and compensation.

The situation is rigged such that – according to the figures available now and assuming that The Washington Post stock lost half of its value by 2018 – Weymouth would still stand to make over $7 million if she meets the unpublicized goals.

And according to the article at the City Desk, Weymouth could even start earning money on the shares in question before 2018. How? Accounting tricks that allow some forms of restricted stock to earn dividends even before the stock is vested. At the Post’s 2011 annual dividend rate of $9.40 per share, Weymouth would stand to make $399,500 a year in dividends alone.

The net result of Graham’s total control of the board is declining revenue and the gutting of what was once touted as a flagship newspaper. On May 21, 2012, The Wall Street Journal reported that S&P lowered its outlook on the Post Company to negative. Reuters reported on July 11, 2012, that Moody’s had placed The Washington Post’s A3 rating on review for downgrade.

It seems that under the autocratic control of Donald Graham, the grand old Washington Post may be soon be looking for decent burial. That would be bad news for Graham’s family, but it would be disastrous news for Class B shareholders, including the institutional investors that own WaPo stock.

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