Smart Investing


August 10, 2012


Watch out for cable companies' 'dividend darling' reputations

In early August, one of my favorite publications, Barron’s, had an article titled “Cable Stocks Are the New Dividend Darlings.” The article brings up the three biggest cable companies, Comcast Corp., Time Warner Cable Inc. and Charter Communications Inc.

I don’t have room to write about all three so I will just go with the first one, Comcast (Nasdaq: CMCSA), to see if the dividends are worth getting from this company, or if it is one of those companies that suck investors in only to see their investments decline in value.

Comcast Corp. provides entertainment, information, and communications products and services in the United States and internationally. The company’s Cable Communications segment offers video, high-speed Internet and voice services to residential and business customers. As of Dec. 31, 2011, it served 22.3 million video customers, 18.1 million high-speed Internet customers and 9.3 million voice customers in 39 states and the District of Columbia.

Interesting to note is that the industry of communication services has an industry PE of 49.2, and Comcast has a PE of 19.8, well below the industry but still pricey. A stock price of $34.50 and the mean estimate of earnings per share for the year ending December 2013 of $2.21 equals a forward PE of 15.6.

Price to sales for Comcast of 1.6 is just slightly higher than the industry average of 1.4. The price to tangible book value is nonexistent because of goodwill of $27 billion and intangible assets of $82 billion; I can’t remember the last time I saw this high of intangible assets on a company with a market cap of only $92 billion. What’s to worry about, you may ask?

The company has a debt to equity of 78 percent. That's not a problem until investors understand that if Comcast has to write down some of that goodwill — like News Corp. (Nasdaq: NWSA) just wrote off $1.6 billion — the debt-to-equity ratio for Comcast will increase. Investors should also know that the total equity of this company is only $48 billion less than half of the combined goodwill and intangible assets.

The Barron’s article written by Tiernan Ray talks about cable stocks as the new dividend darlings, and I expected to see a 4 or 5 percent dividend. Instead, I found a 1.9 percent dividend rate that the company needs 30 percent of its earnings to pay out. I know I only picked one of the three, but few should think about buying this company for its dividend.

One area where this company does shine is revenue and earnings-per-share growth.

Year over year, Comcast saw its revenue jump 30 percent while the industry could only manage an 11 percent increase. Earnings per share also increased at a rate of 27 percent when the industry dropped by a 73 percent rate year over year.

Over the last 12 months, the company saw a return on equity of 10.1 percent compared to the industry average of 4.5 percent. Comcast also had a nice net profit margin of 9.8 percent, well above the industry average of 2.9 percent.

Comcast does a great job collecting on its receivables, turning them over 13.9 times over the last 12 months when the industry could only manage a turnover rate of 9.5 times.

Cash flow from operations for the first six months of the year was $7.8 billion, nearly a $900 million increase from the first six months of 2011. Capital expenditures were $2.9 billion for the first six months of 2012, a $200 million increase from last year.

Earnings-per-share estimates for the last 90 days for the period ending December 2013 have only increased by a penny, yet the stock has climbed more than 10 percent during this period. Using a forward PE of 17 would yield a stock price of only $37.57, less than a 10 percent growth on the stock to a reasonably priced company trading at 17 times earnings. The PEG ratio looked OK at 1.3, and analysts project growth to be at 14.1 percent over the next five years.

Will the stock grind higher? That’s always a good possibility, but don’t forget about the debt, the goodwill, the intangible assets and the lofty price based on the FPE compared to many other companies.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


August 10, 2012