Buy Comcast: Dividend Hike In The Cards

| About: Comcast Corporation (CMCSA)

Shares of the largest cable operator in the U.S., Comcast Corporation (NASDAQ:CMCSA), have traded up 5% since the company announced its latest quarterly results, and over 60% since the start of the year. The company had an excellent year, both in terms of the stock price movement and operations. It has brought about an impressive turnaround in its video losses due to the investments in its video platform and broadband, and it is very likely that the company will soon return to growth in video subscriber additions. Moreover, with the recent spectrum sale and a robust cash flow generation, the company is well poised to return substantial capital to its shareholders in the form of dividends and share buy-backs, which it has already announced. I am bullish on the stock and see further upside, despite it trading close to its 52-week high of $38.22.

Credit rating agencies S&P and Fitch have both assigned the company's recent debt issue an investment grade rating, which reflects Comcast's strong position as the largest cable operator in the country. Even though the likely buyout of General Electric's (NYSE:GE) stake in NBC Universal Media LLC by Comcast will lead to a slightly higher leverage, the credit rating agencies are of the view that Comcast has enough financial flexibility and strength to absorb the said buyout. The company's liquidity position is sound, supported by cash on hand of approximately $9 billion and the available borrowing capacity of over $6 billion. Moreover, the company's debt maturities are well laddered and covered by its cash flows that have grown consistently over the years.

Comcast has been posting strong results consistently. The company had yet another solid quarter of operations, which was reflected positively in its revenues that increased by over 15% to $16.5 billion. Similar growths were seen in its operating cash flows and operating income that grew 10% and 15% respectively in Q3 2012. There was an abnormal growth in earnings per share in the quarter, largely due to the company's recent spectrum sale. Even after excluding the effect of the above mentioned transaction, EPS grew 40% to $0.46 in Q3 2012.

Perhaps the most impressive metric released by the company was net additions for its cable segment. Combined net additions were up almost 30% from the year ago quarter, an exceptional growth. Net additions for cable are following a consistent upward trend. Net additions of 294,000 for the video customers, high speed internet and voice subscribers were above expectations and exceeded the net additions for the year ago quarter by 65,000 subscribers. These results were made possible due to the company's investments in digital and DOCSIS. Even though the improvement in housing had no significant impact on its net additions, according to the company's management, Comcast is still well positioned to return to growth in video adds for the first time in over five years, a great achievement, no doubt. Cable EBITDA margins of 40% were up slightly from the Q3 2011 results, which was largely due to the better than expected advertisement sales from the increased political spending before the elections. These hikes in the advertisement spending will also serve to fuel EBITDA growth in the fourth and last quarter of the year.

NBC Universal also posted solid results which were reflected in the segment's revenue growth of 31% in the third quarter. Even though the results were positively impacted by the 2012 Olympics, which contributed over $1 billion to the segment's revenues, revenues increased by almost 9% after excluding the boost to revenues from Olympics. Operating cash flows showed robust growth as well, improving by 20% in Q3. The strong box office performances which included 'Ted' and 'The Bourne Legacy' gave its Filmed entertainment segment a 25% boost to its revenues. Going forward, these box office performances are likely to lead to strong DVD releases in the holiday season, which could provide a meaningful boost to film revenues in the fourth quarter.

Given the performance of the company's stock over the last year, coupled with the strong growth in its revenues, operating cash flows and earnings, I believe that Comcast holds the potential for a significant upside. As far as dividends are concerned, the stock currently yields 1.7%-- well covered by its operating cash flow yield. Moreover, the company has the capacity to significantly grow its dividends. Comcast is focused on pushing its dividend yield higher than that of S&P, which was discussed by the company's management in the last year's dividend increase decision. S&P currently yields 2.05% and to match its yield, the company would have to bring about a growth of almost 20% in its dividends. It is currently paying an annualized dividend of $0.65 per share, meaning the payments would go up to $0.78 to match S&P's yield of 2.05%. Given the outstanding growth in the company's cash flows and robust operations, it is very likely that management might announce another dividend hike when it reports its last quarter's results.

CMCSA is trading at 17 times its forward earnings. Based on the 2014 EPS estimate of $2.6, the target price comes out to be $44--an upside of 16% based on the current share price. Total potential return is almost 18%, based on the current dividend yield.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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