Undervalued Dividend Growth Stock of the Week: Comcast (CMCSA)

Renowned investor Benjamin Graham famously personified the stock market as “Mr. Market”.

In his view, the market is akin to a manic-depressive business partner.

And this business partner is constantly trying to buy or sell pieces of a business at prices that vary from day to day depending on his mood.

A euphoric mood results in a high price, and a pessimistic mood results in a low price.

The key for any long-term investor is to understand and take advantage of Mr. Market.

Taking advantage of Mr. Market’s mood swings is something I’ve repeatedly done since I first started investing in 2010.

And that helped me to build enough wealth and passive income to retire in my early 30s.

By the way, I explain exactly how I did that in my Early Retirement Blueprint.

A big part of my success has been the investment strategy I’ve used and continue to use.

That strategy is dividend growth investing.

It’s all about buying and holding shares in world-class enterprises paying reliable, rising dividends.

You can find hundreds of examples of these stocks on the Dividend Champions, Contenders, and Challengers list.

By taking advantage of Mr. Market’s mood swings through the dividend growth investing strategy, I built the FIRE Fund.

That’s my real-money portfolio.

And it produces enough five-figure passive dividend income to live off of.

Jason Fieber's Dividend Growth PortfolioOf course, I try to buy high-quality dividend growth stocks when Mr. Market is pessimistic and willing to sell shares cheaply.

This bad mood can lead to undervaluation.

Whereas price is what you pay, value is what you actually get.

An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk. 

This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.

Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.

That higher yield correlates to greater long-term total return potential.

This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.

And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.

These dynamics should reduce risk.

Undervaluation introduces a margin of safety.

This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.

It’s protection against the possible downside.

Taking advantage of a Mr. Market mood swing by buying a high-quality dividend growth stock when it’s undervalued positions you to experience fantastic long-term investment results.

Now, taking advantage of Mr. Market requires you to recognize value in the first place.

Fortunately, it’s not that hard.

Fellow contributor Dave Van Knapp has made that easier than ever.

His Lesson 11: Valuation, which is part of a comprehensive series of “lessons” on dividend growth investing, deftly explains how to go about estimating the intrinsic value of almost any dividend growth stock you’ll find.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

Comcast Corporation (CMCSA)

Comcast Corporation (CMCSA) is a media and entertainment conglomerate with interests in cable, broadcasting, film, streaming, live entertainment, and theme parks.

Founded in 1963, Comcast is now a $236 billion (by market cap) media monster that employs nearly 170,000 people.

The company reports operations across three primary segments: Cable Communications, 57% of FY 2020 revenue; NBCUniversal, 26%; and Sky, 17%.

Cable Communications provides 20 million cable video connections, 31 million high-speed internet connections, and 11 million voice services.

NBCUniversal is comprised of several leading cable networks, two broadcast networks, the Peacock streaming service, owned-and-operated TV stations, regional sports networks, a major film studio, and Universal theme parks.

Sky is a major European satellite television broadcaster.

Comcast reports insignificant revenue from their Corporate and Other segment. Other business interests primarily consist of the operations of Comcast Spectacor, which owns the Philadelphia Flyers and the Wells Fargo Center arena in Philadelphia, Pennsylvania.

Comcast is a perfect example of a stodgy, old-school company reinventing itself in order to better compete in a new business landscape.

The traditional cable video bundle is slowly dying.

However, Comcast is very much not dying.

To the contrary, they’re growing.

First, there’s the connectivity theme playing out here.

As one of the largest broadband providers in the United States, they’re benefiting from the continued growth in broadband demand.

Access to the Internet is almost as important as access to electricity or running water at this stage.

And with the work-from-home trend showing real legs, Comcast should see no letup in demand for home broadband connectivity.

The “cord-cutting” headline is misleading. Consumers might be letting go of the video, but they’re definitely not cutting that broadband cord – which leads right to Comcast.

Since Comcast typically has limited or no competition in their markets, it’s a utility-like position they’re in. Except the economics are more favorable, because there’s less regulation.

Second, there’s the streaming theme.

To paraphrase Thanos (a fictional character that’s ironically part of a competing company’s IP), consumers’ can not live without content, and where does that bring them? Back to Comcast.

That’s because of the massive trove of content they’re moving over to their streaming platform, Peacock.

Indeed, Peacock already has more than 50 million customers after launching less than two years ago. And it’s mostly confined to the United States at this time. Going global will increase their potential customer pool by more than an order of magnitude.

Basically, the company is taking advantage of two megatrends: high-speed internet access, and streaming entertainment.

All of this is to say, Comcast’s best days are still likely ahead of it.

And that bodes well for their ability to grow revenue, profit, and the dividend for years to come.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Already, Comcast has increased the dividend for 14 consecutive years.

The 10-year dividend growth rate of 16.3% is really strong.

And you’re pairing that double-digit dividend growth with a market-beating yield of 2.0%.

By the way, this yield is 20 basis points higher than its own five-year average.

With a low payout ratio of only 32.2%, the dividend has plenty of room to head higher.

These dividend metrics are very good.

Revenue and Earnings Growth

As good as they are, though, they’re largely looking at the past.

However, investors risk today’s capital for tomorrow’s rewards.

And so I’ll now build out a forward-looking growth trajectory for the business and its dividend, which will later help when it comes time to estimate the stock’s intrinsic value.

I’ll first show you what the company has done over the last decade in terms of top-line and bottom-line growth.

Then I’ll reveal a professional prognostication for near-term profit growth.

Amalgamating the proven past with a future forecast in this manner should allow us to draw conclusions about where the business might be going from here.

Comcast increased its revenue from $55.8 billion in FY 2011 to $103.6 billion in FY 2020.

That’s a compound annual growth rate of 7.1%.

I usually look for mid-single-digit top-line growth from a mature business like this.

Comcast exceeded my expectations here.

Meantime, earnings per share rose from $0.75 to $2.28 over this period, which is a CAGR of 13.2%.

Super impressive.

Despite all of the hysteria over “cord cutting”, Comcast has produced outstanding numbers.

And we can now see where all of that heady dividend growth has come from – it’s been supported by hefty EPS growth.

It’s worth noting that a ~17% reduction in the outstanding share count over the last decade helped to propel a lot of this excess bottom-line growth.

Looking forward, CFRA forecasts that Comcast will compound its EPS at an annual rate of 14% over the next three years.

Seeing as how this lines up well with what Comcast actually produced over the last 10 years, CFRA is basically looking at a continuation of the status quo over the next few years.

CFRA specifically highlights Comcast’s margin expansion (via “favorable mix shifts to high-margin connectivity businesses”), buybacks, and “a firming recovery path for its advertising, TV/film content, and theme parks businesses”.

I concur with CFRA here. There’s no reason for me not to.

Comcast’s most recent quarter showed 33.8% YOY growth in adjusted EPS.

Simply put, the company keeps putting up the numbers.

With the payout ratio being so low, shareholders would be right to expect more double-digit dividend growth for the foreseeable future, but I would expect that to moderate somewhat when looking out past the next 5-10 years.

Financial Position

Moving over to the balance sheet, the company maintains an okay financial position.

The long-term debt/equity ratio is 1.1, while the interest coverage ratio is over 4.

The balance sheet is clearly the weakest part of the business. They’re certainly not in dire straits, but there’s room for improvement here.

Profitability is robust.

Over the last five years, the firm has averaged annual net margin of 14.6% and annual return on equity of 20.1%.

Comcast is operating at a very high level.

And the business is protected by durable competitive advantages that include large economies of scale, high barriers to entry, and the ability to operate as a local monopoly in many markets.

Of course, there are risks to consider.

Regulation, litigation, and competition are omnipresent risks in every industry.

Regulation is a rising issue in the industry, but Comcast benefits from limited (or no) competition across local markets.

While the “cord-cutting” phenomenon appears to be overblown, cable video disconnections do hurt the company disproportionately.

This affects them both on the cable video side (distribution) of the business, as well as the cable networks side (production). Less consumers watching traditional cable television networks is a “double whammy” for Comcast.

Comcast also faces technological obsolescence risk.

If better and/or cheaper internet access can be scaled by a competitor, this would greatly impact the business model. 5G wireless options from the telecom operators could be such a threat.

I see the balance sheet as a risk. The indebtedness limits their future flexibility.

Finally, theme parks are being directly impacted by the pandemic. But this is more of a short-term issue.

It’s important to be mindful of these risks, but this business could still be a stellar long-term investment.

With the stock nearly 20% off of its 52-week high, the valuation only serves to make the long-term investment case that much more compelling…

Stock Price Valuation

The stock’s P/E ratio is 16.2.

That’s noticeably low in this market.

It’s also slightly lower than the stock’s own five-year average P/E ratio of 16.3.

And the yield, as noted earlier, is higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a dividend discount model analysis.

I factored in a 10% discount rate and a long-term dividend growth rate of 8%.

That dividend growth rate is as high as I go.

So I’m giving the company the benefit of the doubt.

But I think Comcast deserves it.

Their long-term EPS growth rate and near-term EPS growth forecast are both much higher than this.

And the company’s demonstrated long-term dividend growth rate is well into the double-digit range.

Plus, the payout ratio is still rather low.

If anything, Comcast will likely grow the dividend at a rate that exceeds my mark for the foreseeable future. I would then assume a moderation when going past 5-10 years out.

The DDM analysis gives me a fair value of $54.00.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

I don’t see my valuation as aggressive at all, yet the stock still looks somewhat cheap.

But we’ll now compare that valuation with where two professional stock analysis firms have come out at.

This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates CMCSA as a 4-star stock, with a fair value estimate of $60.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates CMCSA as a 4-star “BUY”, with a 12-month target price of $60.00.

I came in low this time around, which surprises me. Averaging the three numbers out gives us a final valuation of $58.00, which would indicate the stock is possibly 15% undervalued.

Bottom line: Comcast Corporation (CMCSA) is a media and entertainment conglomerate operating at a very high level while taking advantage of two megatrends. With a market-beating yield, double-digit dividend growth, a low payout ratio, nearly 15 consecutive years of dividend increases, and the potential that shares are 15% undervalued, dividend growth investors would be wise to consider adding this stock to their portfolios for the long term.

-Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Note from DTA: How safe is CMCSA’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 89. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, CMCSA’s dividend appears Very Safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.

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Source: DividendsAndIncome.com