Dividend growth stocks are favored due to their ability to generate high revenue and earnings growth, along with their shareholder-friendly management teams that decide to return a portion of cash to shareholders. One company that has become a strong dividend growth stock, due to its business model and growth potential is Comcast Corporation (CMCSA).

Comcast's track record of high dividend growth makes it a common holding among investors, even institutional investors such as Viking Global. This article will examine Comcast’s most recent quarter, its prospects for growth, dividend history and potential returns to see if now is the time to purchase shares of the company.

Business Overview and Recent Earnings Results

Comcast is a leading media, entertainment, and communications company. Its business segments consist of Cable Communications, which provided high-speed internet, video and voice services, NBCUniversal, which includes cable networks, broadcast TV and theme parks, and Sky, a European entertainment company that provides video and wireless services to customers. Comcast was founded in the early 1960s. The company has a current market capitalization in excess of $218 billion.

On October 29^th, Comcast reported third-quarter earnings results for the period ending September 30^th. Revenue decreased by almost 5% to $25.5 billion, which was more than $800 million above consensus estimates.  Adjusted earnings-per-share of $0.65 was an 18% decrease from the previous year but topped expectations by $0.14.

Total customer relationships increased 4.9% to 32.7 million. Cable Communications added a net 556K new customers while total high-speed internet net additions were 633K. Both results are a quarterly record for the company. The company also saw wireless customers grow by 133K.

NBCUniversal continues to feel the impact of the COVID-19 pandemic as revenue fell 18.9% to $6.7 billion, mostly due to lower contributions from filmed entertainment and theme parks. Peacock, which is an NBCUniversal streaming service, has almost 22 million sign ups since launching. Revenues for Sky additions, which had declined in the previous quarter due to the ongoing pandemic, were up sequentially.

Comcast is expected to earn $2.50 in 2020, which would be a 20% decline from the previous year. Much of this decline is due to the impact of COVID-19. Long-term, we feel that the company can grow earnings at a 7% rate due to leadership in the market and its portfolio of products.

Growth Prospects, Dividend History, and Potential Returns

Cord-cutting remains a risk for all media companies, but so far Comcast has navigated this trend quite well. Cable Communications added more than a half-million net new customers during the last quarter. Access to high-speed internet also remains in high demand from consumers.

The addition of Sky also gives Comcast a foothold in Europe, allowing it access to millions of potential customers. Very few companies in this space offer products and services to as many people as Comcast.

Comcast has increased its dividend for the past 12 years. The company’s most recent increase was announced in late January of this year, which resulted in a 9.5% raise in the stock’s dividend. While the most recent raise is below the 10-year average of 16%, it was still a very solid increase.

The annualized dividend of $0.92 equates to a dividend yield of 1.9% currently. This is slightly higher than the average yield of the S&P 500. Best of all, the expected payout ratio of 37% for 2020 leaves ample room for future growth even if a recession were to impact Comcast’s business performance.

Shares of Comcast trade for ~$48. Based off of expected earnings-per-share, the stock has a forward price-to-earnings ratio of 19.2. We feel that a five-year target valuation of 14.8 times earnings, slightly below the stock’s 10-year average valuation, is appropriate given the effects of cord cutting on the market as a whole. If the stock were to revert to this target by 2025, then valuation would be a 5.1% headwind to total returns over this period of time.

Total returns would consist of the following:

• 7% earnings growth rate
• 1.9% dividend yield
• 5.1% multiple reversion

In this scenario, Comcast will return ~4% annually through 2025. This is a decent expected rate of return, but not enough to warrant a buy from value investors.

Final Thoughts

Comcast has a lot going for itself. The company has managed to withstand the cord-cutting that has hampered other companies in the space and also has the potential for future growth due its sizeable media empire. The COVID-19 pandemic has impacted certain businesses, but this impact will eventually fade as the world recovers.

Comcast has increased its dividend for more than a decade and has a very low payout ratio. The combination of growth and payout ratio gives the company a strong shot at one day joining the Dividend Aristocrats.