One of the big worries of those new to investing is the thought of losing money.
I find this worry to be strange and funny.
After all, every dollar you spend on consumption of any kind (rather than investing it) is a 100% “loss”.
Once money is spent, you never get that money back.
On the other hand, money intelligently invested is unlikely to result in a permanent loss of capital.
That part about doing it intelligently might seem like the trick part, but it’s really not.
This is where dividend growth investing comes in.
It’s a long-term investment strategy that prizes buying and holding shares in world-class businesses that are so good at relentlessly producing rising profits that they relentlessly pay shareholders rising cash dividends.
You can find many examples of what I mean by pulling up the Dividend Champions, Contenders, and Challengers list.
When you own shares in wonderful businesses, it’s hard to lose money over time.
Furthermore, when you’re collecting rising cash dividends along the way, you’re slowly getting paid back anyway.
No consumption will do that for you.
I’ve been using this strategy for nearly 15 years now, allowing it to guide me as I’ve gone about building my FIRE Fund.
This real-money portfolio generates enough five-figure passive dividend income for me to live off of.
In fact, it’s been enough for me to live off of since I decided to quit my day job and retire in my early 30s.
If you’re wondering how that played out, make sure to read my Early Retirement Blueprint (it shares the details).
But there’s another critical component: valuation.
That’s because price only represents what you pay, but it’s value that represents what you 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.
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 capital used for consumption and instead using it to buy high-quality dividend growth stocks at attractive valuations can set you up to avoid 100% losses and build significant wealth and passive dividend income on the road to financial freedom.
Now, everything I just laid out does assume that one already has a basic understanding of valuation already built up.
If that’s not you, don’t worry.
Fellow contributor Dave Van Knapp’s Lesson 11: Valuation, which is part of an overarching series of “lessons” designed to teach the DGI strategy to newcomers, explains (using simple terminology) how to go about valuing almost any business out there.
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 Corp. (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 $142 billion (by market cap) media might that employs nearly 190,000 people.
Comcast classifies itself as operating two primary businesses: Connectivity & Platforms and Content & Experiences.
Connectivity & Platforms is reported across the following two segments: Residential Connectivity, 57% of FY 2023 revenue; and Business Services Connectivity, 7%.
Content & Experiences is reported across the following three segments: Media, 20%; Studios, 9%; and Theme Parks, 7%.
Connectivity & Platforms is largely comprised of Comcast’s broadband and video distribution assets, including more than 30 million high-speed broadband subscribers and more than 14 million video subscribers.
The other half of the business, which is Content & Experiences, is largely comprised of NBCUniversal broadcast TV and film studio assets, Peacock streaming, cable television networks (including Sky), and global Universal theme parks.
In addition, through Comcast Spectacor, Comcast owns the NHL’s Philadelphia Flyers, as well as the Wells Fargo Center arena in Philadelphia, Pennsylvania.
I think we can all agree that “cord cutting” is a real phenomenon that is here to stay.
Consumers are choosing a variety of streaming platforms on an à la carte basis rather than the all-in-one OTT cable packages of yore.
Cable TV is clearly in secular decline.
This must mean Comcast, the US’s largest provider of cable TV, is doomed, right?
Actually, no.
Management saw the turn coming ahead of time and smartly diversified the business years ago, building it into a vast media and entertainment empire.
It has the likes of theme parks, sports, and movie studios.
Perhaps most importantly, this empire is built upon the rock-solid foundation of broadband.
Because Comcast is also the largest provider of broadband internet in the US through its 30+ million subscriber base, consumers must often go through this company in order to stream (via the internet) all of that content anyway.
And since Comcast often operates as the only major provider in many markets, it essentially controls localized monopolies over what modern-day consumers can’t really live without.
On top of this, Comcast has Peacock, a successful streaming platform of its own.
Peacock most recently showed 29% YOY growth in paid subscriber count, now up to 36 million.
Furthermore, demand for high-speed internet, in general, is in secular growth mode, due to all kinds of needs and applications (entertainment, work, communication, etc.).
That obviously bodes well for Comcast and its built-in infrastructure.
All well and good, but there is still the elephant in the room: legacy linear TV assets.
Well, this is changing.
Acknowledging the evolving media landscape while simultaneously concentrating on its strengths in growth assets, Comcast also recently announced that it will spin off NBCUniversal’s portfolio of TV channels (such as CNBC and MSNBC).
After this is done, Comcast’s remaining assets will be very exciting and exposed to almost no challenges as they relate to the demise of the OTT package and traditional TV channels.
It’ll be a new dawn for Comcast and its shareholders, setting up the business for continued revenue, profit, and dividend growth over the coming decades as it thrives within “new” media.
Dividend Growth, Growth Rate, Payout Ratio and Yield
To date, Comcast has increased its dividend for 17 consecutive years.
The 10-year dividend growth rate is 10.9%, which is very solid, although more recent dividend raises have been in a high-single-digit area (around 7%).
But even just 7% dividend growth is enough to get the job done in this case, as the stock yields a market-beating 3.3%.
Assuming a static valuation, the sum of yield and growth gets you to your annualized total return.
So we can see how Comcast is setting investors up for a possible 10%+ annualized total return.
And that’s not bad at all, especially from a so-called “dying” business.
Plus, if there’s upside available from multiple expansion, that’s extra.
By the way, that 3.3% yield is 100 basis points higher than its own five-year average.
For investors who bought years ago, maybe that’s sour milk.
However, for those looking to get in now, it’s more juice to make the squeeze worth it.
With a payout ratio of just 33.4%, Comcast has plenty of room to continue growing its dividend at a fairly brisk pace.
The dividend metrics here check pretty much every box.
You get health, growth, and a palpable yield.
Tough to dislike this setup.
Revenue and Earnings Growth
As tough as it might be to dislike, though, a lot of this is relying on past dividend metrics.
However, investors must always be concerned about the future, as the capital of today ultimately gets risked for the rewards of tomorrow.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will definitely come in handy during the valuation process.
I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this manner should give us the information we need to make an educated judgment call on where the business could be going from here.
Comcast advanced its revenue from $68.8 billion in FY 2014 to $121.6 billion in FY 2023.
That’s a compound annual growth rate of 6.5%.
Very solid top-line growth from a mature business like this, particularly considering all of the headwinds and change in media.
But it’s important to keep in mind that Comcast has been acquisitive, positively impacting absolute revenue growth.
The main example is the $39 billion deal for Sky in 2018.
On the other hand, Comcast has shown steady revenue growth both before and after the Sky acquisition.
Meanwhile, earnings per share grew from $$1.60 to $3.71 over the last decade, which is a CAGR of 9.8%.
Comcast is an interesting case where the narrative doesn’t match the reality at all.
The narrative surrounding Comcast is that it’s in secular decline.
The reality is that it’s a healthy business.
Comcast’s routine share repurchases helped to drive a lot of excess bottom-line growth.
It’s been a buyback machine, reducing its outstanding share count by approximately 21% over the last 10 years.
Looking forward, CFRA sees Comcast compounding its EPS at an annual rate of 7% over the next three years.
This forecast seems fair to me, lining up fairly well with where recent dividend raises have landed.
I think this 7% number is a pretty good base case for Comcast’s overall growth profile.
Notably, Comcast was hit pretty hard by the pandemic and the resulting closures of theme parks and reduced demand for moviegoing.
Pent-up demand for these experiences have subsequently helped Comcast.
CFRA states: “We see a continued rebound at the NBCU division, with a full reopening of the worldwide theme parks and the studio pipelines combined with growth in TV distribution and ad revenue. At the cable division, we see continued growth in wireless subscribers (versus further losses of video and voice customers).”
CFRA also comments on the upcoming spin and the possible upside from this transaction: “[Comcast] announced a spin-off of its network cable portfolio (excluding Peacock). The new, well-capitalized company would go to its existing shareholders. We have a positive view on the spin as it would most likely result in a valuation re-rating for its higher-growth businesses, while the SpinCo can focus on jump-starting growth.”
Lastly, CFRA highlights what I mentioned earlier about Comcast’s broadband-based foundation: “Meanwhile, with the cable broadband business recently riding some demand tailwinds, the company has increasingly pivoted to a broadband-led connectivity strategy and gained significant traction in its nascent wireless offering.”
These three passages go a long way toward rounding out what the investment thesis is all about.
Comcast has mostly healthy, growing business units, and the one area of the business that is secularly challenged is being released so that the rest of the company can flourish and, perhaps, get more respect from the market.
One appealing differentiator for Comcast is its management situation, which is allowing it to make this pivot.
Brian Roberts (part of the founding Roberts family) runs Comcast as CEO and owns all of the company’s B shares (giving Roberts about 1/3 of all voting control).
It’s rare to see so much “skin in the game” in a large US company, and this alignment and incentive should encourage common shareholders.
I think Roberts is doing the best he can with the business model he’s running.
If Comcast can reach CFRA’s growth forecast on the EPS side of things, that opens the dividend up for like (or better) growth.
And you’re getting that on top of the 3%+ starting yield.
Plus, there’s the possible rerate story playing out.
It’s tough to imagine a scenario where one loses money with Comcast over the next decade or so.
To the contrary, these numbers would indicate a good backdrop for a 10%+ annualized total return (with a good chunk of it coming in the form of that dividend).
It’s not otherworldly or anything, but 10% would be a very respectable number to hang one’s hat on.
Financial Position
Moving over to the balance sheet, Comcast has a weak financial position.
The long-term debt/equity ratio is 1.1, while the interest coverage ratio is over 5.
I get squeamish when the interest coverage ratio is below 5, and Comcast is dangerously close to that level now.
Comcast ended last fiscal year with about $90 billion in net long-term debt, which is a gigantic pile of debt – even for a company of Comcast’s size and might.
It’s sobering.
I’m turned off by the balance sheet and find it to be by far the worst aspect of the business, but I think it’s also important to point out that Comcast has been slowly deleveraging.
Gross long-term debt has moved down from nearly $106 billion in FY 2020 to about $95 billion in FY 2023.
I’d certainly like to see a lot more progress on this front.
Profitability, though, is more than decent.
Return on equity has averaged 13.7% over the last five years, while net margin has averaged 10.2%.
ROE is helped by the balance sheet, but even ROIC is typically coming in at over 10%.
These are far from the highest returns on capital that you’ll find, but these are not bad numbers at all for a mature media company.
Overall, Comcast’s combination of a broadband-led strategy and a tactical pivot toward growth opportunities in media (while shedding letting legacy media assets) positions the firm for a bright future.
And with economies of scale, entrenched infrastructure, high barriers to entry, and the ability to operate as a local monopoly in many markets, the business does benefit from durable competitive advantages.
Of course, there are risks to consider.
Regulation, litigation, and competition are omnipresent risks in every industry.
While the broader media industry is fiercely competitive, Comcast benefits from often being the only major cable/broadband player in any given market.
Streaming TV is an existential threat to the cable bundle, but Comcast counters this with Peacock and broadband (because streaming television requires internet access).
Cable television usage is in secular decline, which harms Comcast both in terms of distribution and production, but the spin-off alleviates much of this pressure.
Comcast faces technological obsolescence risk, with competitors constantly trying to bring better, cheaper, and/or faster internet access options to market (e.g., 5G wireless, LEO satellites).
The balance sheet is highly levered, limiting Comcast’s ability to return capital, fund growth, and pursue attractive M&A targets.
The company’s reputation for customer service is legendarily awful, greatly harming brand power.
I think Comcast has some real risks to contend with, but the strong market position, monopolistic control, and base demand for broadband all offer a lot to like.
What also offers a lot to like, which offsets a lot of risk, is the appealing valuation of the stock after a multiyear period of severe underperformance…
Valuation
The stock is trading hands for a P/E ratio of 10.
We’re almost at a single-digit P/E ratio, which is incredible.
This is less than half that of the broader market’s earnings multiple, and it’s well off of the stock’s own five-year average P/E ratio of 16.3.
And the yield, as noted earlier, is significantly 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 7%.
If you’ve been following along, this 7% number lines up with what Comcast is doing in terms of its business and dividend growth.
Recent dividend raises have been right at this mark.
And the near-term forecast for EPS growth is also exactly 7%.
With the payout ratio still being quite reasonable, I don’t see why Comcast would knowingly choose to grow the dividend slower than the business.
At the same time, with industry challenges and the balance sheet being loaded, I wouldn’t expect the dividend to grow meaningfully faster than the business.
I think this is a fair, down-the-middle call.
The DDM analysis gives me a fair value of $44.23.
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.
Based on my viewpoint, the stock looks downright 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 $54.00.
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 $50.00.
Surprisingly, I came out low. Averaging the three numbers out gives us a final valuation of $49.41, which would indicate the stock is possibly 25% undervalued.
-Jason Fieber
Note from D&I: 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 dividend appears Very Safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.
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.
Disclosure: I have no position in CMCSA.