Stock gloom rains on Warner Music parade

It seemed Warner Music would end the year on a high note, as it announced Thursday the settlement of a simmering feud with mega-act Linkin Park as well as a new dividend for shareholders.

But no sooner did the diskery issue its double album of good news than it received a setback from Wall Street.

Warner Music disclosed a five-year, $15 million deal with Linkin Park, whose last full-length record, “Meteora,” rung up more than 10 million in album sales. It also confirmed a dividend payout that will amount to about $80 million per year, or 13¢ per share.

But Standard & Poor Equity research wasn’t impressed and came out with a “Strong Sell” recommendation. It suggested the company’s stock should trade at $15 instead of its current price of $19, implying Warner Music is overvalued by more than 25%.

With an investigation looming into digital download pricing and music sales generally soft, the country’s only stand-alone public music company faces a long and winding road.

In some ways, Warner Music enjoyed a remarkable turnaround in 2005, beginning with an IPO in May initiated by its new owners, a group of equity investors that include Bain Capital, Thomas Lee Partners and Edgar Bronfman.

Critics voiced worries about the profitability of a separate music company in a conglom age, but the diskery quickly proved them wrong. Warner Music’s stock now trades at a higher price than that of Time Warner, the company from which it sprung.

But the S&P report cited a pending investigation from New York Attorney General Eliot Spitzer — in which the company reportedly was among several subpoenaed for allegations of price-fixing on digital music — and a slowdown in CD sales as reasons for its recommendation.

There are more particular reasons the company may need to worry.

While a dividend can provide a buzz to smaller investors, Wall Street often shrugs, saying the money could be better spent if it were reinvested in the company.

Also, Warner Music’s WEA group has faced a rough patch. Last week it reorganized sales and marketing divisions in an attempt to shift its focus from terrestrial to digital sales. Move follows tumult at its Atlantic label earlier in the year that saw the top exec ankle.

Like other industry titans, Warner Music hopes Apple’s Steve Jobs comes around on variable pricing for iTunes. But even if he does, labels risk criticism that they are artificially inflating revenue, as well as pushback from consumers who embrace the simplicity of flat pricing. For every rose, Warner Music is finding a thorn.

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