TipRanks Smart Dividend Newsletter – Edition #31

Hello and welcome to the 31st edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.

Today’s dividend stock recommendation is the world’s largest media company, featuring robust profitability, significant cash generation, as well as a strong alignment with shareholder interests.


Investment Thesis: Profitable Entertainment

In today’s increasingly connected world, the media and telecommunications industry plays a vital yet understated role in our daily lives. This sector, with its expansive range of services, from high-speed connectivity to immersive entertainment experiences, is an essential part of the modern lifestyle. Its significance lies in its ability to adapt and evolve, meeting the ever-changing demands of consumers globally.

The industry’s offerings, including residential broadband, streaming services, theme park entertainment, and much more, reflect a deep understanding of the diverse preferences of its audience. These services have become more than just amenities: they are integral to the way people connect, relax, and engage with the world. The growth of this sector is underpinned by an increasing appetite for varied forms of entertainment, which has become a fundamental aspect of life for people everywhere. As consumption patterns continue to evolve, these services are expected to experience sustained demand, supporting steady revenue streams.

As an investment opportunity, this sector offers a compelling blend of quality, value, and growth potential. The integrated business model of leading companies in this space provides a stable foundation for the continued increase of shareholder returns.



Quality Dividend Stock: This Week’s Top Pick

Comcast Corporation (CMCSA) is a global media and technology company. Comcast operates multiple cable-only channels and over-the-air national broadcast network channels, produces films and television programs, and operates theme parks in the U.S. and internationally. Comcast also has significant holdings in digital distribution, providing streaming, connectivity, and other services to businesses and households.

Comcast Corporation operates through the following business segments: Residential Connectivity and Platforms, Business Services Connectivity, Media, Studios, and Theme Parks. The Residential Connectivity and Platforms segment provides residential broadband and wireless connectivity services, residential and business video services, advertising sales, and Sky channels (Sky is one of Europe’s leading entertainment companies).

The Business Services Connectivity segment offers connectivity services for small business locations, including broadband, voice, and wireless services. They also offer connectivity solutions for medium-sized customers and larger enterprises, as well as small business connectivity services for international locations. The Media segment operates NBCUniversal’s television and streaming business, including national and regional cable networks, the NBC and Telemundo broadcast networks, NBC and Telemundo-owned local broadcast television stations, and Peacock, a direct-to-consumer streaming service. It also operates international networks comprising the Sky Sports channels, as well as other digital properties.

The Studios segment runs NBCUniversal and Sky film and television studio production and distribution operations. The Theme Parks segment operates Universal theme parks in Orlando, Florida, Hollywood, California, Osaka, Japan, and Beijing, China. The company also owns the Philadelphia Flyers and the Wells Fargo Center arena in Philadelphia, Pennsylvania, and in addition Comcast operates Xumo, a consolidated streaming platform.

The company was founded in 1963 when a small cable operator from Mississippi, American Cable Systems, was spun off from its parent, Jerrold Electronics. It was re-incorporated in Pennsylvania in 1969 under the new name “Comcast Corporation,” and began publicly trading on NASDAQ in 1972.

Since its establishment as an independent corporation, Comcast has grown its size and expanded its service suite through heavy investment in innovative services, as well as through numerous acquisitions. Thus, in 1986, Comcast bought 26% of a broadcast company Group W Cable, doubling its number of subscribers to 1 million. In the same year, Comcast made a founding investment in QVC, a flagship shopping channel, which today broadcasts to more than 350 million households in seven countries.

In 1988, CMCSA acquired American Cellular Network Corporation, becoming a mobile phone operator. In 1996, Comcast became an internet provider with the co-founding of @Home Network company. In 1997, Microsoft (MSFT) invested $1 billion in Comcast, and the company launched its digital TV service. That same year, Comcast acquired a controlling interest in the E! Entertainment TV network through a partnership with Walt Disney (DIS).

In 2002, Comcast acquired AT&T Broadband from AT&T (T), which made CMCSA the largest cable television company in the United States. In 2005, the company acquired a 20% interest in Metro-Goldwyn-Mayer, increasing its stake in the film production business, and created a new division aimed at developing its Internet businesses. In 2009, Comcast became the nation’s largest Internet service provider. In 2011, CMCSA purchased a controlling stake in NBCUniversal from General Electric (GE), completing the full buyout in 2013.

In 2016, Comcast entered into a partnership with Verizon (VZ) to launch a cellular network called Xfinity Mobile, which allowed the company to offer a “quadruple play” of services to its customers (broadband Internet access, TV, telephone, and wireless services). In 2018, Comcast acquired British media and telecommunications conglomerate Sky Group (one of Europe’s leading media and entertainment companies and producer of Sky News). After this acquisition, the company shifted its strategy from aggressive expansion through buyouts, to investment in value creation through organic growth.

Today, CMCSA is the largest American telecommunications and media conglomerate, the world’s largest media company by market value, and the largest broadcasting and cable television company in the world by revenue. It is also the second-largest pay-TV company, the largest cable TV company, the largest home Internet service provider, and the third-largest home telephone service provider in the U.S.

Comcast commands a market capitalization of over $177 billion, an annual revenue of $122 billion, and a workforce of over 186,000 employees, serving clients all over the world at the flagship company and its various subsidiaries, including Xfinity, NBCUniversal, Sky, Comcast Business, EffecTV, FreeWheel, Comcast Ventures, Comcast Technology Solutions, Comcast Spectacor, and others.

CMCSA’s financial health is robust, despite its high debt, which increased with the launch of Peacock TV in 2020 and the subsequent heavy investment in content. In addition, Comcast has reported increased investment while constructing the Epic Universe theme park in Orlando, which is scheduled to open in 2025. As a result of these and other outlays and investments, Comcast’s debt-to-equity ratio is now a high 122% (although it has been cut from the peak of over 151% in 2019). CMCSA’s debt is well-covered by operating cash flows, while the interest payments are covered by EBIT many times over.

Besides, Comcast’s debt is highly rated by major rating agencies: “A3” at Moody’s, “A-” at Fitch Ratings, and “A-“ at S&P Global Ratings, representing the highest level of the ratings scope.

In particular, Fitch applauded Comcast’s “strong competitive position as a leading media and telecommunications company,” saying that its “portfolio of diverse assets and networks generate meaningful and defensible cash flows.” Fitch added that Comcast’s Sky segment provides the company “with meaningful diversification, significantly increasing its scale and creating a global distribution platform and strengthening the combined company’s content and intellectual property portfolio.”

Fitch said that it believes that CMCSA is “strongly positioned to address the secular shifts that are transforming the media and telecommunications industry. Comcast’s operating profile benefits from its unique mix of distribution and media/content creation assets that empower the company to address and capitalize on evolving secular trends within the sector. Within Comcast’s traditional cable business segment, the company has successfully pivoted its operating and investment strategy on its connectivity services, including mobile phones.”

Fitch added that “Comcast’s capital structure and financial strategy remains balanced between investing in its businesses and managing net leverage to the 2.4x area while returning capital to shareholders.” Currently, the company’s debt is 2.6x its EBITDA, which, albeit high, does not pose a meaningful financial risk.

In addition, CMCSA is highly effective at generating cash flows; in the past several years, its annual free cash flow (FCF) equated to 63% of its EBIT, which affords the company a high degree of financial flexibility. During the latest 12-month (LTM) period that ended September 30, 2023, the company generated over $17.2 billion of FCF.

As for the company’s capital efficiency, its Return on Equity (ROE) of 18.6%, Return on Assets (ROA) of 5.9%, and Return on Invested Capital (ROIC) of 7.1% may seem mediocre. However, all of these metrics are much higher than the averages for the industry, with ROE being almost double the industry’s average.

Comcast Corp. also features industry-beating profitability, underscored by a gross margin of 70%, EBITDA margin of 31%, operating margin of 19.3%, and net profit margin of 12.5%, all of which place it in the top 25% of its industry. These margins are higher than the company’s own long-term averages, demonstrating steady improvement through the years. In the past three years, CMCSA’s revenues have grown at a CAGR of 5%, while its EPS increased at a CAGR of 17.3%.

On October 26, 2023, Comcast reported its Q3 2023 financial results. In the quarter, both revenue and earnings-per-share exceeded analysts’ expectations, with the EPS beating the forecasts by 13%. In fact, the company has exceeded analysts’ EPS estimates in all quarters when these estimates were available.

In Q3, 2023, revenues increased by 1% year-on-year, adjusted EPS rose by 12.5%, and FCF jumped by over 19%. The revenue increase was led by Theme Parks and Business Services Connectivity, though a revenue decrease in the Studios segment detracted from growth. The company sees Residential Broadband, Wireless, Business Services Connectivity, Theme Parks, Streaming, and Premium Content Creation as the main drivers of future revenue growth and the main focus areas for its investment.

Within Comcast’s capital allocation framework, the company is driving towards three main objectives: investing in organic growth, protecting its strong balance sheet position while reducing leverage to ~2.4x, and returning capital to shareholders.

Regarding the latter, CMCSA has paid regular quarterly dividends since 2009, with payouts increasing for the past ten years at an average annual rate of 12%. In the past three years, the company’s dividend-per-share rose at an average annual rate of 8.2%. The latest dividend increase was in April 2023, when the annual payout was raised by 7.4%.

Comcast’s current dividend yield is 2.6%, versus the Communications sector’s average of 2.5%. Given the company’s modest payout ratio of 28.8% and solid track record of raising cash payouts, as well as CMCSA’s robust profitability and strong cash generation, the dividends are expected to continue increasing for years to come.

In addition to dividends, Comcast’s shareholders are generously compensated via opportunistic buybacks. In the years 2018-2022, CMCSA invested an annual average of $5 billion in share repurchases. In September 2022, the company expanded its existing share repurchase program, almost doubling it to a total of $20 billion, with no expiration date. In Q3 2023, CMCSA repurchased $3.5 billion worth of shares, bringing the total amount of buybacks in the trailing 12 months (through September) to $11 billion.

One of the main reasons for the company’s substantial increase in buyback program capacity was the severe downfall in the company’s stock in the period between September 2021 and September 2022. In this period, the whole Communications sector, as represented by the Communication Services Select Sector SPDR Fund (XLC), registered a substantial loss, and Comcast’s shares were not an exception from this general trend. As a result, in the past three years, CMCSA’s stock has declined 12%. However, the stock has strongly rebounded, surging over 50% from its October 2022 lows.

In the past 12 months, CMCSA has gained 26%, beating the S&P 500 (SPX), which gained 24% over this time period. The comparison to SPX is more relevant for Comcast, as XLC has large holdings of technology outperformers such as Meta (META), Alphabet (GOOGL), and Netflix (NFLX), whose stocks surged in the past year.

Despite last year’s rebound, Comcast is trading under attractive valuations, with its TTM P/E of 12.2 and Forward P/E of 12.3 representing ~28% discount to the Communications sector averages. Moreover, CMCSA is also inexpensive compared to its industry peers, coming at the lower part of the price range. Importantly, Comcast is now about 40% undervalued compared to its future cash flows, thus representing a significant value proposition.

TipRanks-scored top Wall Street analysts see an additional upside of 15.2% for the stock over the next 12 months. Given its strong fundamentals and performance, it may well surprise on the upside. Comcast carries a TipRanks Smart Score rating of 9/10 (“Outperform”) with a “Moderate Buy” recommendation:

In conclusion, we view Comcast Corporation as a compelling combination of quality and value, with the addition of stable growth prospects in the years ahead. Meanwhile, the company’s strong alignment with shareholder interests, reflected in its consistent history of dividend increases and robust share repurchase track record, presents CMCSA as an attractive, long-term income opportunity for dividend investors.



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