May 19, 2008 - The McClatchy Company (MNI-NYSE) is the #3 newspaper business in the US (behind USA TODAY publisher Gannett and Tribune Company), with 30 daily papers boasting a combined circulation of more than 2.7 million. Its portfolio includes The Kansas City Star, The Miami Herald, The Sacramento Bee (California), and the Star-Telegram (Fort Worth, Texas). McClatchy also operates about 50 non-daily newspapers in eight states and operates online news sites in conjunction with many of its papers. In addition, the company has a 49% stake in The Seattle Times Company. The McClatchy family holds more than 90% of the firm's voting power.

First, there's a great dividend of 72 cents a share for a yield of 7.3%. And the dividend is covered. On May 14, the company declared the quarterly dividend, payable on July 1 to shareholders of record of June 11.

Earnings were $1.38 last year with analysts predicting $1.00 this year and $1.30 next year. That's even with revenues dropping noticeably. For the first quarter of this year, sales were down 14% with ad revenues down 15%, because newspapers are highly dependent on real estate and employment advertising. Real estate ads were down 38% while employers pulled back by 34%. On the growing side: Internet ads. They improved by 10.6% in the first quarter and online auto ads jumped by 37%. MNI is a partner of cars.com.

Costs are getting cut. Cash expenses were down 10% in the first quarter; layoffs decreased employees by 7%; newsprint fell by 20% because of lower volume and lower prices. Look for more cuts in every department if revenues continue to fall.

That may happen since the real estate market isn't producing any good news. Of course, the weak real estate market has a ripple effect. Other related advertisers will decrease their budgets, ones like home furnishers. Until there's a turnaround in real estate, don't expect revenues to increase noticeably.

Other numbers: Book value is $5.18 share. Net profit margin is 5%. Sales growth is projected to be 7% a year over the next 5 years, on average. Earnings growth predicted as negative 6% a year, on average, over the same time. Current assets are more than 2 to 1 over current liabilities. Here's the big red flag: Debt is 85% of the capital structure.

If you think the economy will rebound any time soon, you'll want to spend more time with McClatchy. It mirrors the economy fairly well, especially the real estate market. Management has shown it will take the necessary actions to reflect the current times, laying off when needed, cutting expenses. And that dividend is very tempting.

But if the economy doesn't recover, if real estate stays down for several years, this stock could sink even more. And the dividend can't be paid for too long if the earnings don't support it.

- Company Web site: www.mcclatchy.com

- Ted Allrich