Warren Buffett's Buying This Passive Income Stock. Should You?

© Provided by The Motley Fool Warren Buffett's Buying This Passive Income Stock. Should You?

Warren Buffett's team at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) did not reveal any new positions in its 13F filing for the fourth quarter of 2022. While the report was more notable for its sales, Berkshire added shares to a few of its holdings, including Paramount Global (NASDAQ: PARA). The media company formerly known as ViacomCBS has attracted tremendous interest in recent years for its popular programs such as Yellowstone and Tulsa King.

Nonetheless, Berkshire's reversal in Taiwan Semiconductor (TSMC), selling 86% of its holdings just one quarter after buying, may make investors wary of following Buffett's team. Thus, investors should take a closer look at the media stock to better determine whether it's a long-term hold or a short-term trading opportunity.

What may have drawn Buffett's team to Paramount

The good news for Paramount investors is that Berkshire seems more committed to Paramount than TSMC. Berkshire currently owns over 93 million shares of Paramount, amounting to a stake slightly exceeding 15%. It began buying shares in the first quarter of 2022, purchasing around 69 million shares at that time. Buffett's team then added more shares in the third and fourth quarters.

Berkshire has many reasons to take an interest. Subscriber counts increased 81% in 2022, exceeding growth rates in streaming giants such as Netflix and Walt Disney, which have experienced struggles with subscriber growth in recent quarters.

And unlike Netflix and Disney, Paramount offers shareholders a dividend, a factor that might have attracted Buffett's attention. The payout of $0.96 per share yields about 4% and has increased steadily since 2012.

The state of Paramount

Like many other established media peers, Paramount is navigating the transition from traditional television to streaming. In 2022, revenue grew 5% yearly to just over $30 billion. But even though the TV media segment experienced a 4% revenue decline, it currently accounts for 72% of the company's revenue.

Instead, both the direct-to-consumer segment, which includes Paramount+, and filmed entertainment drove revenue growth. Direct-to-consumer revenue surged 47% thanks to streaming, while filmed entertainment increased by 38% as it continued its recovery from the pandemic. Valuable franchises such as Star Trek, Indiana Jones, and Top Gun have helped boost both segments.

Additionally, the Paramount+ subscriber growth did little to help the bottom line as expenses surged higher by more than 13%. Consequently, net earnings dropped to $1.1 billion versus $4.5 billion in 2021. Paramount blamed lower ad revenue for the falling earnings.

Still, it said it would increase prices to help cover the shortfall. And the $5.99 price for the ad-supported tier will make it less expensive than Netflix or Disney.

Investors should also note that Paramount trades at 14 times trailing-12-month earnings, a level that was previously in the mid-single digits. While it remains ridiculously cheap, the higher multiple is a product of the recent earnings implosion.

Additionally, free cash flow has fallen to negative $139 million. The $689 million in common and preferred dividends Paramount paid in 2022 may partially explain why its cash reserves dropped to $2.9 billion versus $6.3 billion at the end of 2021. That is not a sign of immediate trouble, but if cash flows do not turn positive soon, investors could start to question the dividend's viability. 

Should I follow Buffett and his team into Paramount?

Value investors might take this opportunity to add shares. While Paramount is experiencing some headwinds with ad revenue and free cash flow, those are likely temporary. And given that it will still offer a low price for its streaming service, a significant drop-off in subscribers is not expected.

Although declines in television viewership may negate streaming gains, Buffett's team likely bought the stock for Paramount's popular franchises and its dividend. Investors who follow Buffett and his team into Paramount should benefit from these strengths.

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Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway, Netflix, Taiwan Semiconductor Manufacturing, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.