Comcast (CMCSA): High Marks for Dividend Safety and Growth, But What About the Cord-Cutters?

Business Analysis

Since the Cable Services business is the largest segment and is arguably the most controversial due to cord cutting, we need to dig further into this business.

Comcast was founded in 1963 by Ralph Roberts as a single-system cable operator in Tupelo, Mississippi, with the purchase of American Cable Systems, a 1,200 subscriber cable system.

Over its history, one of the main ways the company grew was from acquiring many large and small cable operators to build out its footprint in major metropolitan areas.

Some of the larger media investments over the years include Group W Cable, Storer Communications, Maclean Hunter, E. W. Scripps, Jones Intercable, Prime Communications, Lenfest Communications, AT&T Broadband merger, and NBCUniversal, along with a whole host of other transactions.

More recently Comcast attempted to merge with Time Warner Cable, but the transaction was terminated after large opposition from industry groups, the general public, and antitrust authorities.

All of this merger and acquisition activity over decades has made Comcast into the largest cable company in the United States. Their coverage extends over many major metropolitan areas including Philadelphia, Washington, DC, Pittsburgh, Chicago, Indianapolis, Denver, SanFrancisco, Portland, and Seattle.

All in all, they pass nearly 56 million homes and businesses and have nearly 28 million total customer relationships. They have 22.3 million video customers (cable TV), 23.3 million high speed internet customers, and 11.5 million voice customers (telephone).

The company’s costly network infrastructure, convenient bundled services, vertical integration, and sizeable subscriber base serve as key competitive advantages.

A small number of players dominate the industry, and barriers to entry are high because of the major investments required for technology infrastructure, programming content, and customer acquisition.

Without a large subscriber base, these costs cannot be covered. The mature state of the industry makes it especially difficult for new entrants to acquire customers.

The main concerns of many investors and industry participants is how declining cable subscribers from cord cutting and declining voice subscribers will affect the business.

It is hard to argue with some of these arguments as Netflix, Inc. (NASDAQ:NFLX), Hulu, and other “Over-the-Top” platforms continue to add subscribers, but let’s take a look at the actual numbers.

While total video customers are down in recent years, so far cord cutting hasn’t had a huge impact on their subscriber numbers. Customers are down a little over 1% from 2013 levels, or from 22.6 million to 22.3 million. Furthermore, the 36,000 video customers lost in 2015 was the company’s best result in nine years.

Despite the slight decline in the number of customers, video revenue was up nearly 5% from 2013 to 2015.

Video revenues rose as a result of more customers receiving additional services (HD or DVR advanced services) and increasing pricing. 13.9 million of their subscribers now receive at least one of their HD or DVR advanced services, up from 13 million in 2014 and 12.5 million in 2013.

As seen below, rising revenue per customer relationship has helped drive cable revenue higher over the last couple of years.

Comcast CMCSA Dividend Stock

Source: Comcast Investor Presentation

Throughout the first six months of 2016, they have actually been able to hold Video customers relatively flat compared to year end 2015. Furthermore, they have been able to grow revenue by 3.3% year-over-year during this timeframe.

While cord cutting is certainly a risk that needs to be monitored, for now it has not proliferated throughout the subscriber base. Also, Comcast can retain many of these marginal customers by offering a “skinny bundle,” or just a small subset of channels that desired most by certain subscribers.

Even though Comcast is very unlikely to grow video subscribers, they should be able to retain the vast majority of their base and be able to grow revenue through pricing and adding on additional services.

Total voice customers were up around 7.5% from 2013-2015 (from 10.7 million to 11.5 million) while revenue was down around 2% during this timeframe.

The main reason voice revenue declined despite the increase in customers is because it was negatively impacted by the allocation of voice revenue for their customers who received bundled services. The amount Comcast allocated to voice within the bundled service decreased while the amount allocated to video and high-speed internet rates increased.

So far year-to-date in 2016 these same trends have continued. Voice customers are up slightly from year-end 2015 to 11.6 million and up about 3% year-over-year, while revenue is down by about 1%.

With the proliferation of cell phones, it is probably safe to say that if voice was not included as a bundled service, the total number of customers would likely be declining. This is not a major driver of Comcast’s economics and we are comfortable with the current strategy of bundling the service.

On the topic of voice, it’s also worth pointing out that Comcast plans on offering its own wireless service (2) by mid-2017. This action could potentially help Comcast’s bundling proposition and further raise switching costs for its subscribers.

Despite cord-cutting, Comcast appears likely to remain a dominant force in the media industry for years to come.