This Media Giant Should Keep the Dividends 'Streaming' In

Comcast Corporation is a media giant that has diversified its business model in the past several years, and as a result has a strong growth outlook up ahead. The recent trend of cord-cutting is a lingering challenge for cable providers, but Comcast's steady growth continues. Comcast remains a market leader in media and communications, while the end of the pandemic is a huge boost to the company's theme parks. The company has increased its dividend for over a decade, and we expect it to continue raising its dividend at a high rate each year. With a market-beating yield, Comcast is a blue-chip stock for dividend growth investors. Prime Time Player Comcast Corporation is an industry giant. It is a media, communications, and entertainment conglomerate with leading brands across all of its operating segments. Its businesses include Cable Communications, NBCUniversal, Theme Parks, Broadcast TV, and Sky. Comcast offers high-speed Internet, video, voice, wireless, cable networks, filmed TV, and other services. The company has generated excellent growth over the first half of the year, as it is benefiting from the gradual reopening of the economy. In the second quarter, revenue of $28.54 billion increased 20% year-over-year, and beat analyst estimates by $1.37 billion. At $8.9 billion, adjusted earnings before interest, taxes, depreciation, and amortization increased 12.6% year-over-year. Comcast reported the best broadband and total customer relationship net additions on record for a second quarter. Total broadband customer net additions were 354,000. Theme Parks revenue increased by $958 million to $1.1 billion and had the first profitable quarter since the first quarter of 2020. On an adjusted basis, earnings per share of $0.84 beat by $0.17 and represented 21.7% year-over-year growth. More Channels for Growth Over the next five years, as the economy normalizes, we see several drivers for the company's earnings growth. The first one is ongoing revenue growth, driven primarily by Cable Communications revenues, which grew 3.4% in 2020 and over the first half of 2021 primarily due to greater demand in high-speed internet. This revenue has grown by single digits for most quarters on a year-over-year basis, and it seems reasonable to assume that growth will continue in most cases going forward. The Video operation is battling against the impact of cord-cutting, but so far higher revenues in the high-speed internet business more than offset this headwind (cord-cutters need even stronger Internet speeds for streaming). Apart from revenue growth, Comcast's earnings are driven by margin increases in its core business. Lastly, share repurchases are an additional catalyst for EPS growth, as Comcast generates strong free cash flow which can be used to repurchase stock. We believe Comcast has the potential for double-digit earnings growth going forward. To be specific, we expect 12% annual earnings-per-share growth over the next five years. The company has a long history of growth. From 2010 to 2019, its EPS grew every year, by an average of 19% annually. The major driving factor for Comcast's future growth will be the end of the pandemic. We expect a recovery as soon as the COVID-19 pandemic ends. Over the next five years, as the economy normalizes, we see several other drivers for the company's earnings growth. Revenue growth will be driven primarily by a higher customer count and rate increases. Although video revenue is struggling with cord-cutting, higher revenues in the high-speed internet business have more than offset that headwind. As its earnings grow, so will the dividend. Comcast has increased its dividend for 13 consecutive years. The per-share dividend has grown from $0.19 in 2010 to $1.00 for 2021. The payout ratio using expected fiscal 2021 adjusted earnings is 35%. This is a very comfortable payout ratio, which leaves plenty of room for aggressive dividend growth. We expect 10% annual dividend growth moving forward. Good Value Despite the company's impressive growth rates, Comcast stock trades for a reasonable valuation. We expect Comcast to generate earnings-per-share of $2.88 for 2021. Based on this, the stock has a price-to-earnings ratio of 20.2. We believe fair value for Comcast stock is a P/E of 20 to 21, so in our view shares are not significantly undervalued. However, the stock does not necessarily need to experience a further increase in the valuation multiple to generate great returns. Comcast stock can produce strong returns simply from EPS growth and dividends. We expect EPS growth of 12% per year. In addition to the 1.7% dividend yield, we believe the stock has total return potential above 13% per year, even with a flat valuation multiple. Its dividend is well-covered by earnings and cash flows. Comcast is one of the largest players in the entertainment industry. New market entrants would have to spend many billions of dollars to establish as a key cable player or entertainment network. This means that competitive pressures from new market entrants are not very high. The cable industry is impacted by the nationwide cord-cutting trend, though, as some customers are ditching traditional pay-TV entirely. Comcast has so far been able to withstand this trend through growth from its other businesses. We expect Comcast's earnings will experience a steady recovery starting in 2021. Despite a drop in 2020 adjusted EBITDA, Comcast's balance sheet remains strong with a healthy level of debt.

This Media Giant Should Keep the Dividends 'Streaming' In

Comcast is expected to provide double-digit returns.

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