Does Scholastic Have a Moat?

Shareholders of children’s book publisher Scholastic Corporation (NASDAQ:SCHL) are not sitting on gains this year with shares down 7% so far.

Whether you look at a 1-month or 12-month time frame you see a similarly disappointing performance. But when it comes to children’s books, Scholastic is recognized as the largest publisher and distributor, so will its wide moat lead to gains for new shareholders?

Scholastic Has a Competitive Advantage

Some investors have wondered does Scholastic have a moat? Scholastic does have a moat in the form of an extensive collection of bestselling books and e-books, such as the Harry Potter, Hunger Games, and the Goosebumps series. Moreover, it has popular pre-K to grade 12 tech-based learning programs.

That wide moat has translated to admirable top line growth. In FY2019, the last pre-pandemic year, revenues came in at $1.65 billion but they fell to $1.49 billion in FY2020 and $1.30 billion in FY2021.

The top line started to pick up pace once again in FY2022, when revenues of $1.64 billion were posted, and then again to $1.70 billion during the last fiscal year.

Net income followed suit and was positive in FY2019 to the tune of $15.6 million. Thereafter, two consecutive years of net losses followed before a leap back positive to $80.9 million in FY2022 followed by $86.3 million in FY2023.

Will Restructuring Drive Long-term Profitability?

Last year, management announced plans for a restructuring, combining its U.S. Book Fairs and Book Clubs divisions into an integrated school reading events business. While this is expected to be a long-term growth driver as the organizational structure is simplified, the short-term impact has not been that favorable.

For instance, in the third quarter of FY2024 that ended in February, Scholastic’s revenue declined marginally from the prior year’s period to $323.7 million and also missed the Wall Street’s estimate.

Management cited the reason as headwinds from lower U.S. Book Clubs revenues of about $14.4 million related to the strategic repositioning of the business. There were also higher quarterly losses compared to the prior year.

Scholastic is also going through executive and Board changes. This year alone, the company appointed Haji Glover as the Executive Vice President and Chief Financial Officer, as well as Alix Guerrier and Kaya Henderson, who are long associated with K-12 education to the board of directors. It remains to be seen what effect will take place as a result of such changes.

Meanwhile, Scholastic made an investment valued at $186 million in 9 Story Media Group, a company that is known for creating child-focused content. Under the terms, the company will acquire 100% of the economic interest and a minority of voting rights in the content-creating firm.

Is Scholastic’s Dividend Worth Buying?

Even after making such a big investment, which the company intends to fund initially with available cash and a revolving credit facility, management expects to maintain its regular dividend and stock repurchase program.

Scholastic has committed to regular dividends, which have stayed quite stable since first being issued. In the last fiscal year, Scholastic paid $25.6 million in dividends.

Funding also comes from free cash flow that was reported at $60 million for the same fiscal year. Notably, the dividend was fully covered by it.

In the last quarter, the company paid $6.1 million in dividends, while generating a net cash of $78.9 million.

Scholastic paid a $0.20 per share common stock dividend in June in line with previous year’s payments. The current annual dividend rate of $0.80 per share yields 2.15% on the current price level.

Dividend payouts have not only stayed stable but have increased in the recent past. They have grown at a compounded annual growth rate, or CAGR, of 10.1% over the past three years. Scholastic’s payout ratio of 55.17%, while bordering on being high, is by no means unsustainable.

Is Scholastic Worth Buying Now?

If a discounted cash flow forecast analysis is to be believed then Scholastic has 24% upside to fair value of $43.72 per share, though the single analyst who covers the stock seems to be much more bullish with a $54 price target.

Either way, the upside in valuation explains why management is engaged in a share buyback scheme. 

Still, it should be noted that Scholastic trades at 18.5 times forward non-GAAP earnings, which looks quite stretched compared to industry standards.

Overall, Scholastic has lots going for it beyond an attractive valuation. For one, the shareholder yield of 17% is very high. Secondly, dividend payments have been maintained for 17 consecutive years. Third, management is signaling faith in the company by buying back shares. Fourth, the stock trades with relatively low volatility usually, making it attractive even for conservative investors. And finally, net income is forecast to be positive this year.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.