Yahoo (YHOO) stock has enjoyed some success and loads of praise over the last year or two.
But we all knew that YHOO stock was getting ahead of itself after doubling last year.
But despite the flashy moves, the only thing that really matters in the long run to YHOO stock investors is whether the dying portal is turning around its underlying business.
And as Yahoo earnings just showed, it’s not.
Q4 display ad revenue at Yahoo was $491 million, a 6% decline from a year earlier. Even worse, the company sold more ads but made less money as prices fell 7% for its display ad rates.
YHOO stock sold off sharply as a result — even in the face of a decent bottom-line performance. That’s because all the real metric investors care about is the advertising-supported business of the Internet site, which continues to suffer.
And all the other posturing about a dynamic CEO and content strategies and mobile growth can’t make up for the lack of ad revenue at YHOO.
This is what I have been asserting for a long time, most recently on Jan. 6 when I said that “Yahoo’s domestic Internet and advertising business is damaged goods.”
This won’t change anytime soon.
The only reason, then, to own Yahoo is the hope of a special dividend after it cashes in on a highly anticipated Alibaba IPO. Yahoo owns a 24% stake in the Chinese company and will see a cash windfall when it is forced to sell a large portion of that position during the public offering.
Assuredly, YHOO is going to give a large portion of that cash back to investors via a big dividend and buyback. That’s what fellow struggling web portal AOL (AOL) did after it sold some patents to Microsoft (MSFT). Marissa Mayer has already spent a pretty penny on dozens of acquisitions and refused to pay a dividend previously when YHOO sold back a partial stake of its Alibaba position in 2012.
There’s simply no way for Yahoo to NOT deliver its Alibaba windfall back to shareholders this time.
But let’s be honest — that’s the only reason the stock has run up and the only reason to bother holding it going forward.
Investors can hang on to the hopes that the deflationary ad environment will turn around at Yahoo — and across the Internet broadly — or pray that the big spending on acquisitions and new talent will lead to tremendous growth in its user base.
But frankly, both scenarios are long shots.
It’s a dividend or bust for Yahoo stock investors, plain and simple.
The only question is whether any downward pressure on shares between now and that anticipated payout offsets any distribution that YHOO stock owners will get down the road.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.