Four Major Networks, One Winner

By Chad Henage - August 22, 2012 | Tickers: CBS, CMCSA, NWSA, DIS | 0 Comments

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With the Olympics on television and seemingly everyone watching and talking about the events, you would expect that NBC would have received a huge boost from the ratings. However, I read an article recently that said if the network is lucky they might break even on the venture. This got me thinking, of the four major networks, which one would be the best investment?

The four major networks of course are owned by different parent companies. Granted, some of the companies are diversified and have film studios, theme parks, and publishing companies. CBS Corp. (NYSE: CBS) primarily owns CBS and Showtime and recently got a lot of press for raising their dividend by nearly 20% and increasing their share buyback plan by 60%. The company that owns Fox is News Corp. (NASDAQ: NWS), which also has film, television, and publishing interests. In a similar move to CBS, News Corp. recently authorized a huge share repurchase plan of $10 billion. The third major network is ABC which is owned by Walt Disney (NYSE: DIS). Disney is well known as a entertainment powerhouse with its ABC and Disney television properties, the world renowned Disney theme parks, and other properties. Last but not least, the NBC network is owned by Comcast (NASDAQ: CMCSA). Comcast along with being a huge cable provider also provides high-speed Internet and voice services. The company also owns Universal Pictures and the connected Universal theme park. As you can see, each of these companies not only owns one of the most well know television networks, but also each company is a diversified conglomerate of other entertainment properties. To decide which company might be the best investment, let's start by comparing each company's P/E ratio versus their expected growth rate:

Based on just P/E ratio and growth rates, it seems that CBS could be the best value. We'll look at several other metrics to compare the companies, but for now we'll give this category to CBS. At the end, the company with the highest score wins! (CBS – 4, Comcast – 3, News Corp. - 1, Walt Disney - 2)

While earnings can be manipulated, cash flow is usually a better indicator of a company's ability to return profits to shareholders. When it comes to measuring free cash flow, the best way to compare companies across similar industries is by free cash flow per $1 of sales. This allows the investor to compare companies of different sizes. The king of the hill by this measure is Walt Disney, which generated $0.19 of free cash flow per $1 of sales in the most recent quarter. Coming in second is CBS at $0.16, third is Comcast at $0.14, and News Corp. comes in last at $0.08 using this same measure. With the most free cash flow per $1 of sales, we can assume that Walt Disney should have the most relative cash to return to shareholders in the form of dividends or share repurchases. (CBS – 3, Comcast – 2, News Corp – 1, Walt Disney – 4)

Speaking of dividends, looking at a company's yield isn't the only number that matters when it comes to choosing the best option. A company's dividend is made up of three parts: yield, payout ratio, and dividend growth. Let's see how each of these companies does on these three metrics:

I know that some will probably argue which one should win, but in my eyes Comcast is the clear winner. The company pays the highest current yield, and also has grown its dividend by the greatest amount in the last few years. Though the company has the highest payout ratio, none of the payout ratios is excessive. I would place CBS in second place due to its second highest yield, second highest dividend growth, and lowest payout ratio. Third is Walt Disney for similar reasons, and News Corp. comes in last, with the lowest yield, and lowest growth rate. (CBS – 3, Comcast – 4, News Corp. - 1, Walt Disney – 2)

Last but not least, let's compare the four companies balance sheets. Using the debt-to-equity ratio, we can get an idea of the relative risk of each company. Generally speaking, a company with the least amount of debt relative to equity has the least risk. Walt Disney ranks first here with a debt-to-equity ratio of 0.31. Second and third place belong to CBS at 0.58 and News Corp. 0.60, and last place belongs to Comcast with a debt-to-equity ratio of 0.72. (CBS – 3, Comcast – 1, News Corp. - 2, Walt Disney – 4)

Looking at the totals, the scores are CBS – 13, Comcast – 10, News Corp. - 5, and Walt Disney – 12. Using these totals it looks like CBS could be the best value of the four. The company has the best relative valuation, second best cash flow, second best dividend, and second best debt-to-equity ratio. While the company only scored the best in one category, the company is a consistent performer and rated well in all of the other categories. Given that CBS just announced a large dividend increase and share buyback, it's clear the company is intent on returning cash to shareholders. With a low payout ratio, and plenty of free cash flow, investors should expect more of the same in the future.

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