Some stocks have positive traits so obvious that even the most amateur investor could recognize them. When most people start out analyzing companies, they look for items such as revenue growth and share repurchases. More seasoned investors look for improving cash flow, or a low dividend payout ratio. Whether you're an amateur investor or a professional, CBS (NYSE:CBS) could be exactly what you're looking for.
For the amateurs
If you get right down to it, strong revenue growth should be one of the first considerations for the amateur investor. When you compare CBS' performance to its primary competition, the company beats them all.
CBS faces some of the most well-known names in entertainment on a day-to-day basis. Companies like Comcast (NASDAQ:CMCSA), which owns NBCUniversal, Walt Disney (NYSE:DIS), and Time Warner (NYSE:TWX.DL), each have properties that represent direct competition to CBS.
Whether it's CBS competing against Comcast's NBC, Walt Disney's ABC, or cable networks like Time Warner's TNT and TBS, these channels all vie for customers' time. CBS' Showtime property also has to compete against Time Warner's HBO premium channel, so as you can see, the battle comes from all sides. What is really impressive is the company's ability to grow revenue by 11% in the last quarter in the face of such stiff competition. While Time Warner nearly matched CBS' performance with a 10% revenue growth rate. Comcast's 7% increase and Disney's 4% growth couldn't keep up.
Many companies give lip service to believing in the value of their stock, but CBS has put its money where its mouth is. Even an amateur investor can see a significant decline in the number of diluted shares and know that this should make existing shares more valuable.
On a year-over-year basis, CBS retired more than 5% of its diluted shares, whereas Comcast and Time Warner retired almost 2% and 2.4% respectively. By comparison, Walt Disney recently announced a large share repurchase program of at least $6 billion, yet the company's diluted shares are actually up slightly compared to last year. Whether it's revenue growth or share repurchases, you get it with CBS.
For the professionals
When you move beyond simple revenue growth, many investors look for good cash flow growth as a way to determine if the company is really growing or not. Second, dividend focused investors like to see a low free cash flow payout ratio to make sure their dividend is well protected.
When it comes to operating cash flow growth, using a core measure of this number in the analysis eliminates some accounting changes that are otherwise included. Core operating cash flow consists of net income plus depreciation and may provide a better comparison than just using reported operating cash flow. On a year-over-year basis, CBS reported that core operating cash flow increased by more than 11%. Their only competitor to report stronger operating cash flow growth was Time Warner with a better than 37% increase. However, Time Warner had the advantage of multiple strong movie debuts which skewed the numbers somewhat. If we look at Comcast or Walt Disney's core operating cash flow growth of nearly 6% and over 7% respectively, you can see the strength of the CBS business model.
What makes CBS' core operating cash flow growth even more impressive is the company's almost comically low free cash flow payout ratio. In calculating free cash flow, expanding the core operating cash flow measure seems to make the most sense. By using net income plus depreciation, and then subtracting capital expenditures, we get a good comparison between companies in the same industry.
Though each of these entertainment companies has a reasonable payout ratio, CBS leads the way at just over 14%. The next closest company by this measure is Comcast at over 16%. Though Disney and Time Warner have low payout ratios of nearly 27%, and over 30%, these numbers still are nearly double the percentage that CBS is working with.
While it is true that along with the lowest payout ratio, CBS has the lowest yield at just less than 1%, the company's combination of strong operating cash flow growth and a low payout ratio would seem to argue for increased dividends in the future. Of course CBS also has a low yield partially because the stock has climbed nearly 50% (from $37.50 to $55.46 today) in the last year.
Whether you're an amateur investor or a number-crunching professional, it seems apparent that "America's Most Watched Network" offers something for everyone. Maybe investors should take a cue from television watchers and make this America's favorite stock as well.
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.