Time Warner Cable: A Shareholder-Friendly Company With A Great Product

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The second-largest cable operator in the U.S., Time Warner Cable (NYSE: TWC) has performed very well for its shareholders over the past few years, rebounding nicely from the 2009 low of $20.19 to the $100-ish level it trades for currently.  Additionally, the company began paying a dividend and implemented one of the best buybacks in the market.  With the company set to report its 2012 earnings on Thursday, Jan. 31, investors want to know that there are still good times ahead for Time Warner Cable, despite the growing competition.

Just to make readers aware, the giant gap down in 2009 as seen in the chart below was not a crash in the share price, but the splitting off of Time Warner’s other businesses.

 

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Time Warner Cable currently has about 12.5 million subscribers -- not a bad market share, given that its cable systems encompass about 29 million homes.  That means about 43% of Time Warner’s potential customers are subscribers.  Even though this is a good percentage, it still leaves room to grow.  The company’s Road Runner internet service has 11.3 million subscribers (38.5% of homes), and its digital phone service has 5.2 million subscribers (18%), mostly bundled with other services. 

I don’t foresee the phone service expanding by a significant amount going forward, but the cable and particularly the internet service both have definite potential.  The numbers listed above, the most recent available, applied as of the end of June 2012.  During the earnings call, pay attention to the new data in these three categories.  Any signs that the internet service is expanding would be very welcome news by investors.

Although Time Warner Cable has been increasing its footprint with several recent acquisitions, such as Insight Communication this past year, the competitive landscape has gotten tougher over the past few years, and this is my biggest concern with Time Warner going forward. 

Always a threat, satellite providers DirecTV (NASDAQ: DTV) and Dish Network (NASDAQ: DISH) are both investing a ton of resources on advertising and courting new customers.  However, satellite has positives and negatives, which may ultimately bring customers back to cable. 

One issue with satellite is that while there is on-demand content, it is structured differently.  Instead, it is similar to downloading a movie on the internet, causing an inconvenient delay before you can actually watch.  The inconvenience of no TV in bad weather is a big turn-off as well.  Consumers are apparently frustrated with satellite, as the growth of these two companies has significantly slowed over the past few years.

Telecom Giants Verizon (NYSE: VZ) and AT&T (NYSE: T) are more of a threat, with their growing TV service.  I’m most familiar with AT&T’s U-Verse, since that is what is available in my area.  These two companies have a unique competitive advantage in that they can offer “bundle” discounts to their wireless customers.  U-Verse is offering a bundle deal that includes TV, internet, and a digital phone for only $89 for existing wireless customers.  However, there is the issue of not being able to watch and/or record a total of two HD channels at once in the entire house.  Very inconvenient if you have several TV’s.

As far as numbers are concerned, here are the stats for the most recent quarter:  DirecTV added right around 100,000 subscribers, while Dish Network LOST 111,000 subscribers, for a net loss of 11,000 satellite customers.  Further proving my point of being the major threat, UVerse added 192,000 subscribers and Verizon's FiOS Tv service added 134,000 new subscribers. To my dissapointment, Time Warner lost 140,000 subscribers.  In my opinion, this is more due to the growing field of competition (Who had UVerse or FiOS TV even just a few years ago?), and should level off over the coming quarters.

So, what’s my point with all this?  Yes, the competition is growing.  Yes, there are cheaper deals to be had than cable (AT&T and Verizon).  However, cable is still the best game out there.  Time Warner just needs to remind people of this. 

Time Warner Cable currently yields about 2.2%, but the real story is the excellent buyback program.  Since establishing a $4 billion share repurchase program in November 2010, the number of outstanding shares has gone from 359.5 million at the end of 2010 to 301.8 million as of the company’s last earnings report.  This is a 16% reduction in less than two years!  Time Warner Cable has stated previously that it intended to return over 100% of its free cash flow to shareholders through buybacks and dividends in 2012.  Pay attention to these numbers and the company’s plans for 2013 in this regard.

To sum it up, this company has a great product and has proven themselves in recent years to be very shareholder-friendly.  More important than the particular numbers released will be any information on the company’s progress and future plans to increase returns to shareholders.  Especially important is what the company has to say in regards to the declining number of TV customers, and whether or not they expect this to level off like I (and most analysts do).  On the other hand, if the numbers do disappoint further, it could create a very nice buying opportunity in a great company.


KWMatt82 owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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