Comcast: Dividend Growth Investors Should Wait For A Better Entry Point

| About: Comcast Corporation (CMCSA)

With many Americans experiencing anemic wage growth, watching the prices of consumer goods and services rise can be a frustrating experience. In recent years, I've noticed three areas in which the bulk of my annual spending increases (on a percentage basis) seem to be focused: health care premiums, homeowners insurance, and cable/internet services.

My health care plan is managed by a subsidiary of WellPoint (WLP). Over time, I have learned to expect double-digit annual increases in my health care premiums, and despite a shocking price decrease for the upcoming year, I continue to model hefty health care price increases into my future spending expectations. My homeowners insurance is managed by a subsidiary of Berkshire Hathaway (NYSE:BRK.B), and, like my health care premiums, has experienced some pretty large increases in recent years. The two insurers (subsidiaries of WellPoint and Berkshire) seem to be competing for who can reach deeper into my pockets each year. While that is not good for me, it is good for shareholders.

There is very little I would consider doing regarding the price increases. Health insurance and homeowners insurance are two services that I feel like I need. And despite the price increases I've seen in recent years, when shopping around, I realize that my situation is not all that bad compared to what others pay. When it comes to cable and internet service, however, I have less patience.

On New Year's Eve, the latest of what have been far too many letters from Comcast (NASDAQ:CMCSA) announcing price hikes arrived in the mail. Comcast, my cable and internet provider, said the following in the opening paragraph of the price-hike letter:

All of us at Comcast are committed to improving your entertainment and communications experience, and we continue to invest in making your services even better. While we continue to make these and other investments, we periodically need to adjust prices due to increases we incur in programming and other business costs. Starting January 1, 2013, new prices will apply to select Video and Internet services and equipment as indicated in this letter.

As I read the opening paragraph, my first thought was, "No need to do any more investments, Comcast. I'm perfectly happy with the way things are." Then I came to the "other investments" part and thought to myself, "Those massive dividend hikes need to be financed somehow." In 2012, Comcast raised its dividend by 44.44%. That followed dividend increases of 19.05% and 40.00% in 2011 and 2010, respectively. And it wouldn't surprise me to see Comcast offer another impressive dividend increase in 2013. From a dividend payout perspective alone, there is plenty of room to grow the dividend.

With that said, there are a few things I think Comcast shareholders should keep in mind.

1. With the dividend hikes it has sported in recent years, Comcast certainly appears to want to attract dividend growth investors to its stock. But despite the aforementioned massive increases in the dividend, investors putting new money to work in Comcast's stock will only realize a 1.74% annual dividend yield based on the recent closing price of $37.36. The S&P 500 (NYSEARCA:SPY) has an indicated forward dividend yield of over 2%, and the Consumer Price Index (CPI) was recently reported at 1.80% for the 12 months ending November 2012. When thinking about the incredible run the stock has had, I have a hunch you will be able to buy Comcast at a higher dividend yield at some point in 2013. In my opinion, a wait and see approach is best for investors thinking about putting new money to work in Comcast at this time.

2. For argument's sake, let's say Comcast can earn $2.60 per share in 2014 and doubles the dividend over the next two years. Even if that rosy scenario occurs, the yield on cost, using the recent closing price of $37.36, would only be 3.48%. A doubling of the dividend over the next two years seems quite unlikely to me, but I wanted to illustrate how the dividend yield would only move into "okay" territory even with such an unlikely dividend increase. And if it takes longer for the dividend to double, investors will spend far too much time with a yield that could easily trail their individual inflation experiences. Again, I am referring to new money being put to work in the stock rather than shares you may have purchased previously.

3. The stock is by no means cheap at current levels. I think it would take very little weakening in the broader economy to knock the current 2013 forward price-to-earnings ratio down a couple of points from its current 16.75. And it shouldn't shock anyone to see weakening in the broader U.S. economy at some point over the next couple of years.

4. One last thing Comcast shareholders should keep in mind is that everyday people don't want to feel like they are getting ripped off. Too many price increases in just a few years might be enough to create such feelings in some of its customers. Additionally, it is not the brightest idea in the world to send out price-hike notices to customers just days before the first payroll tax increase in more than 20 years.

After receiving the most recent price-hike letter, I decided to do a little internet browsing to see if other regions also received price hikes. During my browsing, I came across more vitriolic internet posts regarding Comcast service experiences and complaints then I ever imagined finding about any business. The number actually stunned me. When I think about putting new money to work in the stock market, I'd much rather consider a company that is widely loved by its customers, that trades at a much cheaper valuation than Comcast, and is also likely to grow its dividend over time.

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.

Additional disclosure: I am long WellPoint bonds.