When $1 Billion Isn't Enough

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It wasn't quite the market mover its brain trust likely hoped it would be: Internet conglomerate AOL (NYS: AOL) announced that it plans to return a generous $1.1 billion to its shareholders. That consists of a fat special dividend and a large-scale share-buyback effort. But the market wasn't all that impressed, trading the stock up only a dollar or so after the announcement was made. Apparently, it'll take more than a billion bucks to win back investor sentiment in the company.

Bad memories
For those who don't remember the bright days of the late 1990s bull market, AOL was one of the princes of the Internet. It was America's largest Internet service provider by a long shot, and its raft of exclusive content and services drew upwards of 30 million paying customers. Typically for the era, its stock was vastly inflated in value, and with a swollen share price, the company audaciously bought Time Warner (NYS: TWX) for about $182 billion. Ah, the Internet bubble.

That was the beginning of the end of AOL as a widely liked stock. The rechristened AOL Time Warner was a merger as clumsy as its name; old media and new didn't blend anywhere near as well as proponents of the merger hoped they would. It wasn't long before the marriage was annulled and both partners went their separate ways as independently traded companies.


Together, the two were worth somewhere in the neighborhood of $350 billion at the time. Ever since the e-bubble burst, both have settled down to more realistic levels. Time Warner's current market cap is a little less than $40 billion, while AOL's is an unassuming $3.2 billion.

So in the space of a dozen years, the unlucky shareholders who rushed to add the merged entity to their portfolios lost a collective nest egg of more than $300 billion. Ouch! No wonder AOL's stock didn't move on its most recent piece of good news; this is a company with a recent history of epic investor disappointment.

Still alive, still kicking
After that fiasco, AOL flew under the radar, and for the most part, it's still there. The Internet landscape shifted away from the company. Its sprawling, members-only site was going to last only as long as it held its semi-captive audience. As more Internet connection options came onstream, and free, individually branded sites proliferated, that audience realized they didn't need AOL anymore.

So the company changed. Several years ago, it went the content-is-king route by expanding its portfolio of known Internet media brands. Today, the company has a pretty good clutch of name properties, including TechCrunch, Moviefone, MapQuest, and a 2011 acquisition that briefly returned it to large-font-size headlines in the business and tech press, The Huffington Post. It's a more streamlined operation than the megalith it was back in the Wild West days of the early Internet.

It's also weathered the changing fortunes of the tech space better than some of its rivals of that time. Yahoo!, for example, remains a big, clunky jumble of media/commerce/service assets widely scattered across the Internet. Dell (NAS: DELL) resolutely keeps building and selling PCs even as lower-cost rivals muscle in and take market share. Microsoft (NAS: MSFT) hasn't managed to introduce any compelling new products for a great many years.

Surprise!
AOL's been doing rather well lately. Its Q2 results handily beat estimates (from the analysts who still track the company -- according to Yahoo! Finance it's followed by only six to eight of them, as compared with 29 to 34 for Dell and 30 or so for Time Warner). Those lonely voices in the woods anticipated that the company would take in revenue of $519 million for the quarter. Instead, it brought home $532 million and posted a bottom line of $25 million or so -- and that's after stripping out a huge $946 million one-time gain from the sale of patents to Microsoft.

On the downside, that revenue figure represented a decline from the same period in 2011. However, the drop was the lowest in seven years.

The company -- unlike, apparently, Yahoo! -- is going to put the money in its shares. It plans to split that big one-time gain between its just-announced special dividend, amounting to $5.15 per share, and a stock-buyback program totaling $600 million. Yield on that dividend is pretty fat, at 15%. Although share repurchases are a fairly weak means of creating value, $600 million worth is sure to have some positive effect.

The market isn't impressed by any of this, it seems. So maybe this is an ideal time to load up on shares, at least to clock that five-dollar-plus dividend. AOL stock isn't quite in the doghouse it once was (as recently as last September, its shares could be had for 11 bucks and change), but it's not exactly an investor favorite. Maybe that provides a contrarian-flavored buy opportunity for those who aren't bothered by the company's history.

Microsoft may not be to everyone's taste these days, but its stock spits out a reliable dividend, and the company has big product launches coming up. So it's a good time to take a look at our premium report on the stock, prepared by our in-house experts. This analysis is one of the best on the market, and it's a steal at only $9.99. On top of that, the price includes one year of quarterly updates. Get your copy.

The article When $1 Billion Isn't Enough originally appeared on Fool.com.

Fool contributorEric Volkmanowns shares of Yahoo!Motley Fool newsletter serviceshave recommended buying shares of Microsoft and creating a synthetic covered call position in Microsoft. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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