Merrill Lynch Raises Rating on Gannett

By: Jennifer Saba Merrill Lynch raised its rating on Gannett from "neutral" to "buy" based on the notion that Gannett has room to improve shareholder value.

In a note with the headline "deafening dividend drumbeat" Merrill Lynch analyst Lauren Rich Fine wrote that "investors are becoming obsessed with [Gannett's] ability to pay a much higher dividend and its seeming reluctance to do so."

The catalyst: the successful GateHouse initial public offering which is hanging its strategy on paying out high dividends in the mid-single digits.

Fine and her team estimates that Gannett will generate $5 per share in free cash flow in 2007 but that only $1.28 per share will be paid out in dividends.

If Gannett raises its dividend, there would still be cash left over for acquisitions, the note said.

Merrill Lynch hails Gannett's acquisition strategy: "Unlike its peers who deem every move worthy of a press release, [Gannett] is quietly, albeit aggressively, pursuing a winning strategy in our view," with small technology deals.

As for increasing shareholder value in other ways, Merrill Lynch thinks a LBO is unlikely given the reportedly low bids Tribune received from private equity firms.

Merrill Lynch's price objective for Gannett is $65 per share. Shares of Gannett are trading up 81 cents to $59.97.