The Death of this Industry has been Widely Exaggerated

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

I'm always amazed at the number of reports that suggest cable television companies are going the way of the dinosaur. Looking at the recent results from Comcast (NASDAQ: CMCSA), if cable television is going away, no one told this company. While the company certainly faces its share of challenges, Comcast is much more than just a cable company.

In the cable industry there are essentially two huge conglomerates that dominate their markets. These companies are Comcast and Time Warner (NYSE: TWX). While most people identify these two as primarily cable operators, each one has a diversified portfolio of brands that have nothing to do with coaxial cable running into homes or businesses. For instance, Comcast operates its traditional cable and high-speed Internet division along with national and regional cable networks, NBC and Telemundo, Universal Pictures, and Universal theme parks. While it's true that 65% of the company's revenue is still generated from cable service, there are actually three different pieces to this division itself.

As a traditional cable operator, Comcast faces competitors such as Time Warner, DirecTV (NASDAQ: DTV), and Dish Network (NASDAQ: DISH). In my local area, Time Warner is a non-factor as Comcast is the only local cable operator. While DirecTV does compete for customers dollars, most of the time DirecTV requires a two-year contract to get the best rate. In addition, a challenge for both DirecTV and Dish Network is certain homeowners associations will not allow externally mounted antennas. Many rental units have similar restrictions in what can be placed on the exterior of the unit.

However, you can see that Comcast is losing customers who are choosing either a different provider or some version of internet-powered television as the company lost 176,000 cable subscribers in the most recent quarter. Even with these losses, the company still has over 22 million subscribers, and the average revenue per subscriber increased.

The second piece of the cable communications division is the growing number of high-speed internet subscribers. Seemingly for each video subscriber the company loses, they are gaining a high-speed internet subscriber. The company gained 156,000 new internet subscribers, and ended the quarter with 18.7 million in total. This has also become a competitive advantage as in my area it's actually more expensive to carry only high-speed internet, versus a basic cable package plus high-speed internet. For instance, to have just high-speed internet would cost nearly $70 per month. High-speed internet with basic cable including taxes is slightly less than $70 per month. This is one way that cable companies can stem video subscriber losses, by offering basic cable packages combined with a discount on high-speed internet service. Along with internet service, what bundle would be complete without telephone service?

Comcast offers a voice over IP solution that can replace customer's traditional home telephone. In the last quarter, the company signed up 158,000 new voice subscribers, ending with 9.7 million in total. Though high-speed internet and voice subscriptions are traditionally less profitable than video subscriptions, the company is adding more subscribers on a net basis than it is losing. In addition, the remainder of Comcast revenues are not connected to subscriber numbers whatsoever.

In the company's Cable Networks division, revenue increased 3.64% and operating income decreased 7.59%. This followed a similar trend in Broadcast television, where revenue decreased 9.14% and operating income was down 3.31%. Both lines of business had problems with less advertising revenue and less distribution income. The company's NBC division, however, should get a boost from airing the Olympics, which have been widely watched and generated a lot of interest. Where the companies Filmed Entertainment division is concerned, revenue was down 1.83%, and operating income showed an $87 million loss compared to a $22 million profit last year. This was primarily due to the lack of a hit movie like Bridesmaids from last year, and the underperformance of Battleship this year. Last but not least, the company's Universal Theme Park division showed a modest increase in both revenue and operating income, as more visitors frequented the park. On the surface, these additional results don't sound very impressive. However, what investors should be very impressed with is Comcast's financial performance.

Of their major competitors, analysts expect Comcast to show the second best growth going forward. This should be no surprise based on the company's recent financial statements. Revenue was up just over 6%, and operating cash flow increased greater than 12%. Comcast significantly improved its balance sheet as well. The company's cash and investments increased 159% to over $4 billion. In addition, long-term debt was cut by $3.7 billion. The company also repurchased over 26 million shares. In fact, Comcast generated over $5.3 billion in free cash flow and paid out just $741 million in dividends. With a free cash flow payout ratio of under 14%, investors should expect significant dividend increases from the company in the future. In fact, I don't believe it's a stretch to say that Comcast may be the best investment option compared to its competition.

Comcast pays a dividend yield of just under 2%, is expected to grow at nearly 15%, and with a payout ratio of less than 14% dividend growth should be significant. While Time Warner pays a slightly higher dividend, the company's growth is expected to be slower. While DirecTV is expected to grow faster than Comcast at 17.58%, the company pays no current dividend. Where Dish Network is concerned, not only does the company not pay a dividend, but they are expected to have anemic growth of just 1.74% for the next few years. Comcast's significant free cash flow, respectable dividend, and potential for dividend growth seems like a winning combination. Though many people will write about the death of cable companies, potential investors should ignore the rhetoric and take a hard look at the potential that Comcast offers.

MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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