The sell-off in the bear market is a gift for investors focused on dividend value, as it gives them the opportunity to deploy fresh dry powder on stocks at market value. Studies have shown that getting a good initial assessment is one of the most important factors for compounding returns over the long term.
This brings me to Comcast (NASDAQ: CMCSA), which is now trading in what I consider high value territory after the recent selloff. In this article, I outline what makes CMCSA a solid buy for potentially above-market returns, so let’s get started.
Comcast is a global media and technology company that provides broadband and streaming services to 57 million customers in the United States and Europe. Its broadband, wireless and video services include Xfinity, Comcast Business and Sky Brands, and its media empire includes Universal, Sky Studios, NBC, Telemundo and Peacock streaming.
Comcast has a collection of moat-worthy assets, not the least of which is its broadband internet footprint which reaches 51% of US homes. This, combined with limited competition, gives it lasting advantages, as noted the morning star below:
We believe Comcast has a large moat, resulting from the strength of its core cable business. Today, the majority of American homes can only receive fixed Internet access service from two providers: the traditional cable or telephone company. In nearly half of the United States, that cable company is Comcast. The cost to enter this market is huge.
Although technological developments have made it possible to build more efficient and reliable networks than those possessed by traditional providers, the deployment of these technologies still requires heavy construction expenses, while overcoming the regulatory obstacles that municipalities often impose. Assuming the network build is successful, entrants then face high customer acquisition costs and start-up losses as they attempt to gain market share, typically with a slightly differentiated product on a rapidly maturing market.
This allowed comcast to enjoy strong profitability. As shown below, it achieves an A+ profitability rating with an EBITDA margin and return on equity of 30% and 15%, respectively.
Much attention was focused on the loss of 10,000 net residential broadband customers in the second quarter, whereas in the second quarters of previous years, CMCSA averaged 185,000 net customer additions. This is an indication of mature growth, but has also raised concerns about growing competition from fixed wireless offerings from T-Mobile (TMUS) and Verizon (VZ).
However, I think these concerns are overstated, as home broadband customers use much more network capacity than telephone users, taking up more of the telecommunications bandwidth. As such, fixed wireless growth may not be as aggressive as some investors fear, as wireless service providers may not want to sacrifice network quality for growth in this market.
Meanwhile, CMCSA posted strong adjusted EBITDA growth of 10.1% year-over-year to $9.8 billion in the second quarter, despite the net loss of residential broadband customers. Additionally, CMCSA is expanding its wireless business (via a wholesale deal with Verizon), adding 317,000 customers, and NBCUniversal has increased its adjusted EBITDA by 19.5% to $1.9 billion.
These factors drove strong returns for shareholders, including $1.2 billion in dividend payouts and $3 billion in share buybacks in the second quarter alone. I see potential for strong and continued capital returns for shareholders through Comcast’s various revenue streams, as noted below on the recent conference call:
We are returning a record amount of capital to shareholders and our balance sheet is in very good shape. We also continued to invest in strategically important growth opportunities, including enhancing our world-class broadband network, scaling Xfinity mobile, increasing our capabilities at Business Services, launching Peacock, the completion of Universal Beijing and the start of construction at Epic, to name a few. With substantial cash flow generation and a strong foundation for innovation, Comcast is in a wonderful position.
Meanwhile, Comcast sports a strong A-rated balance sheet and currently earns 3.02%. The dividend is very safe with a payout ratio of 29.6% and a respectable 5-year CAGR of 12%. Applying the rule of 72, the return on cost will double every 6 years.
CMCSA is also screaming cheap at the current price of $35.76 with a forward PE of 9.9, sitting significantly below its normal PE of 18 over the past 10 years. Analysts estimate annual EPS growth of 8% to 12% over the next 2 years and have a consensus Buy rating with an average price target of $48.68. This translates to a potential total return of 39% over one year, including dividends.
Key takeaway for investors
Comcast is a large company with many competitive advantages, including size, market penetration, and scale. He has been a cash cow for shareholders, bringing in billions of dollars through stock buybacks and dividends.
It looks like growth investors have bailed on the stock while value investors are yet to make up their minds. Meanwhile, CMCSA can return significant value to its shareholders, even in a no-growth scenario, simply by buying back its shares at the current steeply discounted price. As such, I consider CMCSA a solid buy for its deep value, capital returns, and moat-worthy assets.