TORSTAR $7.86 - Toronto symbol TS.B

TORSTAR $7.86 (Toronto symbol TS.B; Shares outstanding: 79.9 million; Market cap: $629.2 million; TSINetwork Rating: Average; Dividend yield: 6.7%; www.torstar.com) is up over 20% since early May, when it agreed to sell its Harlequin book-publishing subsidiary to News Corporation (symbol NWSA on New York), the parent company of publishing firm HarperCollins.

We’ve long pointed out that Torstar had a great hidden asset in Harlequin, especially in light of the romance publisher’s successful expansion into e-books.

In 2013, Harlequin supplied 29% of Torstar’s revenue and 32% of its earnings. The company will get $455 million from the sale, which should close by September 30, 2014.

Torstar plans to put the proceeds toward its debt, which stood at $191.3 million on March 31, 2014. The company could use the remaining cash to buy back shares, raise its $0.525-a-share annual dividend (which yields 6.7%) or pay a special dividend.

Selling Harlequin means Torstar will focus entirely on its cyclical newspaper and Internet businesses. That adds risk, but the company’s aggressive cost cuts have helped make these operations more profitable.

In addition, many of Torstar’s papers are market leaders, which puts them in a good position to benefit as the improving economy spurs advertising sales.

Torstar is a buy.

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