Dialing for Dollars

10/07/2009 1:00 pm EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says cable giant Comcast is a money machine, and it has a habit of beating Wall Street’s expectations.

Comcast (Nasdaq: CMCSA), the cable-broadcasting giant, has a lot to offer DRIP investors:

  • Leading market position
  • Prodigious cash flows
  • Rising bottom line
  • Modest valuation

Comcast has 23.9 million cable customers, 15.3 million high-speed Internet customers, and seven million Comcast Digital Voice customers. The company’s content networks and investments include E! Entertainment Television, Style Network, Golf Channel, VERSUS, G4, PBS KIDS Sprout, TV One, and ten sports networks. 

The company is also majority owner of Comcast-Spectacor, whose major holdings include the Philadelphia Flyers NHL hockey team, the Philadelphia 76ers NBA basketball team, and two large multipurpose arenas in Philadelphia.

Comcast is coming off a fairly strong second quarter that saw per share profits increase 57% to 33 cents per share, seven cents above the consensus estimate. Revenue jumped nearly 5% in the quarter to $8.9 billion. Operating cash flow increased 5.5% to $3.5 billion. Voice customers increased nearly 24% in the quarter, while high-speed Internet customers jumped nearly 7%. Video customers fell 2.7%. Video customer growth should improve as the housing market recovers.

For 2009 overall, the consensus earnings estimate is $1.11 per share, up nearly 22% from a year earlier. For 2010, the consensus estimate is $1.18 per share. Given Comcast’s propensity to beat earnings expectations—the firm has beaten the estimate by a wide margin in each of the last four quarters—the 2010 estimate feels especially conservative.

The company’s solid earnings growth and huge cash flow are major reasons a dividend was implemented in 2008. The firm recently raised its dividend 8% to a quarterly rate of $0.0675 per share.

Yet, these shares often get overlooked by Wall Street. Investors get concerned about the competitive nature of cable versus satellite and worry about Comcast’s future growth. Wall Street worries that “net neutrality”—the concept of treating all Web traffic equally—will adversely impact the company. (And recently, investors have been worried about speculation that Comcast was in talks to buy NBC Universal—Editor.)

However, Wall Street will not be able to ignore the company’s earnings and cash-flow growth for long, which means these shares are not likely to be trading in the teens a year from now. (The stock closed Tuesday near $15.50—Editor.)

Comcast traded for nearly $30 per share in 2007. While I don’t expect the stock to eclipse that level in the next 12 months, I would not be surprised to see these shares trade into the low $20s by early 2010. I own the stock and expect these shares to provide me with solid returns over the near and long term.

(Please note that the company’s dividend reinvestment plan requires ownership of at least one share of stock in order to join the plan.)

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