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How Comcast Still Offers Strong Total Returns (Despite Cable Cutting)

Published December 22nd, 2016 by The Financial Canadian

The telecommunications sector is well-known for harboring solid dividend investments.

Comcast (CMCSA) is one of the world’s largest telecommunications companies. They operate under two main businesses (Comcast Cable and NBCUniversal), and have been in operation since 1963.

They also have many of the traits of a solid dividend investment. Comcast’s yield (1.6%) isn’t particularly attractive.  But, they have grown their dividend every year since re-initiating it in 2008 (Comcast paid a dividend in the 1980s and 1990s).

This means that in 2018, Comcast is on pace to become a Dividend Achiever – an elite group of stocks with 10+ consecutive years of dividend increases.

You can see the list of all 273 Dividend Achievers here.

This post will analyze the investment prospects of Comcast in detail.

Business Overview

Comcast Corporation is a telecommunications conglomerate with global operations headquartered in Philadelphia, Pennsylvania.

Comcast has humble beginnings. The company’s earliest roots can be traced back to 1963.  Three business partners purchased a company called American Cable Systems.  The company was a small Mississippi cable company with five channels and 12,000 customers.

Fast forward to today, and Comcast is an incredibly diversified media conglomerate. They have operations in the cable delivery business, box office movies, broadcasted television networks, and even theme parks.

Operationally, Comcast can be divided into two major segments: Comcast Cable and NBCUniversal. For reporting purposes, their cable business is reported as one segment (called Cable Communications). Their NBCUniversal business is split into four sub-segments, as follows:

The following diagram depicts Comcast’s revenue, operating income before depreciation and amortization, and operating income broken down by each of the segments described above.

Comcast Operating Results By Segment

Source: Comcast 2015 10-K

Cable Communications is clearly the largest portion of Comcast’s business.

Comcast also has a significant amount of geographic diversification. Their US operations are widely diversified across states, with concentrations on the East and South coast.

Comcast Geographic Diversification

Source: Comcast 2015 10-K

The company also has further international diversification through their global theme park operations.

Through their subsidiary Universal Studios, Comcast owns international theme parks Universal Studios Japan (opened in 2001) and Universal Studios Singapore (opened in 2011). These international theme parks are nice compliments to domestic locations in Los Angeles and Orlando.

Despite its size, Comcast is family-owned (or at least family-controlled) business.

One of the founders of the company, Ralph J. Roberts, had an instrumental role in the company’s growth and served as its Chief Executive Officer for 46 years.

The Roberts family maintains a controlling stake in Comcast to this day, with Brian L. Roberts (Ralph’s son) currently serving as CEO. While the family owns only ~1% of the outstanding common stock, they own the entirety of the Class B “supervoting” shares – worth a 33% voting stake in the company.

For investors who value the voting rights of their common stock investments, this is something to think about before making an investment in Comcast.

Growth Prospects

While past performance is not a guarantee of future results, Comcast certainly has a track record of creating value for shareholders.

Comcast Earnings Growth

Source: Value Line

Over the past ten years (2006-2016), Comcast’s financial performance has been tremendous. The company has grown at rapid rates:

Looking ahead, Comcast has been busy making strategic investment to ensure the future growth of their company.

A large driver of recent growth has been Comcast’s Theme Parks segment. The financial results of this segment are impressive, with revenues growing at rapid rates throughout fiscal 2016:

Comcast’s Theme Parks segment is expected to be a key driver of growth moving forwards.

The company has also been making strategic bolt-on acquisitions to diversify their revenue streams away from cable communications and improve their bottom line.

For instance, Comcast purchased DreamWorks Animations earlier in 2016, mostly with the intent of monetizing their existing films via theme parks.

With many telecommunications investors concerned about cable-cutting, Comcast’s diversified portfolio of revenue-generating assets leave them well-poised for future earnings growth.

Competitive Advantage & Recession Performance

Comcast has a natural competitive advantage due to the barriers to entry of the telecommunications industry.

The infrastructure, technology, and employee base necessary to create a telecommunications company the size of Comcast is tremendous. This means that new entrants into the marketplace are rare – which bodes well for a well-entrenched player like Comcast.

Comcast also fared quite well during the 2008-2009 global financial crisis. Here is a snapshot of their EPS performance.

Comcast is one of few companies that did not experience a single year of negative earnings during the financial crisis. This is a strong testament to the company’s ability to withstand economic downturns.

Based on their past performance, I would expect Comcast to perform well in future economic recessions.

Valuation & Expected Returns

  Future returns from Comcast are expected to come from three primary sources:

  1. Dividend Payments
  2. EPS Growth
  3. Share repurchases

Comcast currently has a dividend yield of 1.6%. This might not seem juicy on the surface, but Comcast has grown their dividend at a rapid rate since its inception in 2008.

Comcast Annualized Dividend Payments

Source: Value Line

These growing dividend payments will be a source of future returns for Comcast investors.

Shareholder returns will also be juiced by the company’s focus on share repurchases. Comcast has repurchased of truckload of its shares in recent years, as outlined in the following diagram.

Comcast Share Repurchases

Source: Comcast 2015 Investor Presentation

Looking at the past four years alone (2013-2016E), Comcast has repurchased $18 billion of stock, which is an astounding 10.6% of today’s ~$170 billion market capitalization.

The good news is that these share buybacks are poised to continue, at least in the short-term and probably for longer.

In their 2015 10-K filing, Comcast announced that their Board of Directors had authorized a $10 billion stock repurchase program, of which $5 billion was expected to be executed in 2016.

This means that more share repurchases are waiting on the horizon. Even if Comcast repurchases $3 billion of stock annually (less than their recent averages), this will boost per-share results by more than 1.5% annually.

Growth in earnings per share will also be a source of Comcast shareholder returns. Over the past decade, Comcast has compounded EPS at an astounding 22.2% rate.

Now that they are a mature business, earnings growth will likely slow. But even cutting this growth rate in half is still a generous 10-12% annual growth rate. Cutting this in half again leads to an EPS growth rate of 5-6%, which is in line with many large companies.

While these numbers might seem low given Comcast’s track record, it’s always best to conservative when calculating expected returns. Comcast should have no problem compounding earnings per share at a 5-6% rate over the long term.

One last thing to keep in mind is that Comcast is trading at a premium to its historical valuation.

Based on fiscal 2016 EPS expectations of $3.50 and the December 20th closing price of $71.01, Comcast is trading at a multiple of 20.3 times 2016’s earnings.

Looking ahead to next year, Comcast’s consensus earnings expectations are $3.80 per share. Comcast is currently trading at 18.7 times next year’s earnings.

In either case, Comcast is trading above their historical valuation levels.

Comcast Historical Valuation

Source: Value Line

While this is a lower multiple than the overall market (the S&P 500 is currently trading at ~26 time earnings), it is above the company’s historical valuation. The stock price may fall due to multiple contraction.

Altogether, Comcast’s future returns will be composed of:

Long-term investors can expect total returns from Comcast in the range of 8.1%-10.1%. These returns may be reduced from multiple contraction.

Final Thoughts

Comcast has all the makings of a great dividend investment.

They have a proven track record of delivering strong financial performance, a growing dividend, and strong total return prospects.

The only potential downside to an investment in Comcast might be their valuation. However, the entire market is highly valued due to low interest rates. Taking that into account, and the company is likely fairly valued.

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