Comcast Stock: Sleep easy at night and watch dividends rise (NASDAQ: CMCSA)

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Investment thesis

The current market environment is uncertain; inflation and the Ukrainian crisis are beyond the control of investors. At times like these, you should only invest in the highest quality companies with high free cash flow, strong balance sheets, and safe, growing dividends.

Comcast Corporation (NASDAQ: CMCSA) meets all of the above criteria. I was happy to start a position around $48 per share and will add shares if the market continues to undervalue the company. The current share price offers investors the opportunity to realize significant returns over the next few years.

Company presentation

Comcast divides its results into 3 main segments. First, representing approximately 50% of fourth quarter 2021 revenue is “Cable Communications”. This is made up of several sub-components, including broadband and wireless, video, business services and advertising. This is the heart of the business and generates substantial income.

Second, there’s an “NBCUniversal” segment, which accounted for about 30% of fourth-quarter revenue. This is made up of media, studios, and theme parks. Unsurprisingly, this segment has shown strong growth compared to 2020 and we can expect this to continue as the impacts of the pandemic abate.

Finally, most familiar to me in the UK, we have the “Sky” segment. This represented the remaining 20% ​​of fourth quarter revenue. Sky is a UK subscription service where consumers pay to receive exclusive content from Sky which currently includes Premier League football matches from all providers. Sky also offers broadband and internet connectivity to UK households.

Fourth Quarter Results and Tips

Comcast job fourth-quarter revenue of $30.3 billion, up 9.5% from 2020. Full-year revenue increased 12.4% to $116.4 billion of dollars. Looking at each segment of the business, Cable Communications was up 11.6% in 2021. NBCUniversal was up 20.3% in 2021. Sky was up 3.1% in 2021 once currency changes are excluded.

Along with the strong financial performance, management made several capital allocation announcements in its earnings release. First, the dividend was increased by 8% to $1.08 per share annualized. Second, the share buyback authorization was increased to $10 billion (approximately 5% of current market capitalization).

2021 was a banner year for Comcast, management said it was “the highest revenue, Adjusted EBITDA, Adjusted EPS and free cash flow ever. We continue to execute in an extraordinary way, reinforcing our leadership position in connectivity, aggregation, and streaming.”

Management believes there are many opportunities for future growth and is prioritizing “increasing our network capacity in the United States and enhancing our world-class broadband experience.” Comcast’s growth has been steady as consumers have become more connected over the past 20 years. This trend shows no signs of slowing down and investors need to trust management to continue executing.

Competitors

Comcast’s main competitors depend on the operating segment. In Cable Communications, there is strong competition from companies such as Verizon Communications Inc (VZ), AT&T Inc (T), and T-Mobile US, Inc (TMUS). This is a very competitive market with vendors offering customers discounts for switching to them. The offerings of these companies are often similar, so consumers tend to choose a provider based on price. Despite this, the market is growing overall with 5G likely to provide Comcast with further growth in the coming years. Many direct competitors (namely Verizon and AT&T) are in worse financial shape than Comcast. This is a huge advantage for Comcast which can invest regularly and eventually take market share from its competitors. The high amount of capital expenditure required to operate these networks acts as a barrier to entry for new businesses.

In NBCUniversal, the main competitor is The Walt Disney Company (DIS). The competition in this segment is much less than Cable Communications. In many cases, consumers tend to have a preference for Disney theme parks and studios when they have young children, but Universal theme parks appeal more to teenagers and young adults. I would describe this market as a duopoly, with Comcast and Disney effectively controlling the theme park and studio market.

In the UK, Sky faces competition from new content producers including Netflix Inc (NFLX), Apple Inc (AAPL) and Amazon.com Inc (AMZN) as well as former UK-based companies such as BT Group plc (OTCPK:BTGOF). Clearly this has slowed Sky’s growth in recent years and there is no sign of this trend reversing. Sky still has an attractive offer as it can be a base to access much of this new content. I can access Amazon Prime and Netflix directly from Sky, which makes Sky fundamental for consumers who appreciate ease of access.

Risks

Inflation is a risk for almost every business in the market. Inflation erodes consumers’ desire to shop and spend money. For Comcast, that’s true for new Sky subscriptions, broadband upgrades, or trips to Universal theme parks. I think the majority of Comcast’s business is pretty well hedged against inflation though. Consumers need internet service, they value their free time to enjoy content very much and after several years of delay due to Covid-19, families and consumers want to travel and visit theme parks again.

The conflict in Ukraine is unpredictable, we don’t know what Putin will do next. The risks of escalation are high, which would likely lead to a market-wide sell-off. In my view, this would be a buying opportunity for long-term investors. The future cost return increases as the current stock price declines.

Current assessment

At the time of writing, Comcast’s stock price is $45.02, down from its 52-week high of $61.80. Over the past 10 years, Comcast shares have risen about 14% on an annualized basis. The current valuation is attractive, with a PER of 14.8 and a free cash flow yield of over 7.5%.

According to its latest financial results, the company’s financial position is sound, with total debt of approximately $95 billion and cash of $8.7 billion. EBITDA was around $34.5 billion in 2021, so net debt/EBITDA is a reasonable 2.5x. It’s much healthier than AT&T and Verizon.

Looking at my preferred free cash flow performance metric, cash provided by operating activities was $29.15 billion in 2021 and total capital expenditure was approximately $13.02 billion. dollars, leaving free cash flow of $16.13 billion. The latest number of diluted shares outstanding is 4.613 billion. On a per share basis, free cash flow was $3.49, this is a current free cash flow yield of 7.76%, which is very attractive.

Attractive yields and dividend growth

The current forward yield for Comcast shares is 2.4%. The 3-year dividend growth rate is 9.6% and the 5-year dividend growth rate is 12.7%. Going back further, the 10-year dividend growth rate is over 16%. Assuming that the dividend increases by 8% over the next 10 years, the return on the cost of an investment today will be around 5.2%. For such a solid company with a bright future, this is a buy for dividend growth investors. The dividend has now increased steadily for 14 consecutive years.

Look analyst estimates for growth, current projections call for strong earnings growth in 2022 (9.9%) and 2023 (11.8%). Over the next 5 years, growth is expected to be 14.3%. Assuming a 15 P/E as fair value and growth of 9.9%, followed by 11.8% and then 14.3% for the next three years, Comcast would earn $5.92 per share at the end of the period. 5 year period. With a 15 P/E awarded, this would lead to a stock price of $88.8. Almost a double over 5 years is a fantastic return.

There is another boost to expected returns, management buybacks. Shares outstanding have fallen from 5.4 billion shares to 4.6 billion shares over the past decade. The recently extended redemption authorization should enable this trend to continue. It feels good to know that you own more of this solid business as the quarters pass.

Conclusion

Comcast stocks offer excellent return potential for long-term investors. I’m looking to add to my position on any market-wide weakness and I’ll rest easy with inflation and Ukraine risks. This is a fantastic compound opportunity with a low valuation, strong dividend growth, share buybacks and good growth in the underlying business.

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