Comcast Can Pipe Its Own Profits 3 Ways

You might not believe it, but one of Comcast's perceived weaknesses is actually one of its greatest strengths.

Jan 19, 2014 at 12:00PM

Comcast (NASDAQ:CMCSA) gets a bad rap for being a cable company. For all the articles about the high cost of cable, you would think customers were being forced to sign up for these services. The truth is, customers enjoy many of Comcast's offerings, and believe it or not, total cable customers are actually growing! If you look at the company and remove the noise about cord cutters, the real story of Comcast looks pretty enticing.

Cut this!
With companies like Netflix, Hulu Plus, and offerings like HBO Go, you would think that millions would abandon their cable package. However, all the articles suggesting that people are cutting the cord usually ignore a big issue: How do you get access to these streaming services without cable?

Sure, customers could use DSL or mobile broadband to get access to these services, but not at the same quality and speed of a coaxial connection. This is the first way that Comcast can pipe its own profits; the company owns the pipes to get entertainment to you. The truth is, as great as the company's competitors Walt Disney (NYSE:DIS) and Time Warner (NYSE:TWX) are, neither one owns the pipes and the content the way that Comcast does.

While it's true that video customers were down 1.6% in the company's current quarter, these losses were more than offset by increases of nearly 8% in high-speed Internet subscribers, a 26% increase in business services, and a nearly 3% increase in voice revenue. In total, Comcast actually added nearly 1% to its customer base.

With Comcast's Cable Communications business generating operating cash flow of more than $4 billion, this perceived liability is anything but a problem for the company.

Speaking of cash flow
If you look at Comcast compared to a couple of its peers, you find that they all sport dividend-to-free cash flow payout ratios in the low-to-mid 20% range. While investors might not be buying these companies solely for their yield, it doesn't hurt to know that each company's dividend looks well covered.

The second reason Comcast can pipe its own profits for shareholders has to do with the company's relatively low combined payout ratio. Take a look at the difference between Comcast and its peers when we look at the combined payout ratio including dividends and share repurchases.

Company

Dividend-to-Free Cash Flow Payout Ratio

Share Repurchases and Dividend Payout Ratio Combined

Comcast

22%

45%

Time Warner

27%

112%

Walt Disney

22%

90%

Source: SEC Filings. Comcast: nine months; Time Warner: full year; Walt Disney: nine months.)

As you can see, although each company's dividend payout seems relatively well covered, Walt Disney and Time Warner are using a significant portion of their free cash flow to cover dividends and repurchase shares.

While Time Warner's diluted shares declined by more than 3%, the company's more than 100% combined ratio is clearly unsustainable. Disney's diluted shares only dropped by 0.4%, primarily due to the company's penchant for using shares to make acquisitions. Comcast retired 1.7% of its diluted shares, but the company used about half as much cash flow as its peers. This would seem to argue that Comcast could comfortably increase its share repurchases relative to its peers and retire even more shares for the benefit of investors.

Party like it's 2015
Though Comcast's NBCUniversal business is likely to report flat or lower earnings for 2014, next year is likely to be a very different story. In 2014, the company's biggest movie might be Dumb and Dumber To, and comparing this to the success of Despicable Me 2 last year will be difficult.

The third reason Comcast can pipe its own profits: 2015 looks like a very good year for the company's movie business. Comcast's Universal Studios has films like Minions, Fast & Furious 7, Jurassic World, and another Bourne movie slated for release in addition to others.

Though Disney and Time Warner have their own hit films coming out in 2014 and 2015, neither company has such a significant change between its 2014 and 2015 releases. If Comcast's stock takes a hit due to a lackluster 2014, long-term investors should be willing to pick up the shares for a potentially blockbuster 2015 movie season.

Comcast's huge cash flow generated by the cable business gives the company a low combined payout ratio that suggests stronger dividends and share repurchases. Combine this with a potential opportunity in the company's movie releases, and Comcast may be a better value than investors think. To imaging profiting from buying Comcast's stock is anything but a pipe dream.

Profiting from the war for your living room
You know cable TV is going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Fool contributor Chad Henage owns shares of Comcast. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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