Comcast’s Bid for the Content Throne

We don’t watch much TV anymore. But when we do, most of our viewing is via the Internet, on a laptop computer. And our four-year old does most of his viewing on a tablet computer.

In fact, we’ve become so indifferent to television’s charms that our actual TV set is practically vintage, circa 2003.

Indeed, we’re probably the last family in America that doesn’t have a flat screen in our living room (or in every room for that matter). But we haven’t cut the cord just yet.

Every time we try to downgrade or cancel our service, which is part of a bundle that includes Internet and a telephone landline, the cable company essentially cuts us a deal where service for our sole TV is practically free.

Our cable-TV service is so minimal at this point that we don’t even have a cable box anymore. Our TV is just plugged into the wall.

When we finally do cut the cord, we’ll be joining millions of others who’ve done the same, especially the younger generation, who are accustomed to consuming virtually all of their media online.

That’s why content is now king for cable companies, and why they’re shifting from content distributors to content creators.

These considerations likely drove Comcast Corp. (NSDQ: CMCSA) to further expand its already-impressive content portfolio by making a $3.8 billion all-cash bid to acquire DreamWorks Animation SKG Inc.

Comcast’s acquisition of NBCUniversal in 2011 already gave it key children’s properties courtesy of the subsidiary Illumination, the animation studio behind “Minions” and “Despicable Me.” Our wee one goes wobbly for “Minions,” in particular.

This latest deal, which would give Comcast ownership of DreamWorks staples such as “Shrek” and “Kung Fu Panda,” would bolster the $147.3 billion company’s NBCUniversal lineup, adding significant children’s content both online and in movie theaters, as well as for its theme parks.

The DreamWorks transaction is expected to close by the end of 2016.

The cable giant’s burgeoning content portfolio gives us confidence to continue holding the stock, despite the long-term trend toward cord-cutting.

To be sure, Comcast still derives a majority of its revenue from its Cable division (62.9% of full-year 2015 revenue), though video comprises less than half of that segment (about 28.9% of total revenue), while high-speed Internet is rapidly growing, to 16.7% of total revenue.

And the Cable segment still accounts for the vast majority of operating income, at 75.6% for full-year 2015, while NBCUniversal accounts for the balance, at 30.5%.

Comcast’s first-quarter results beat analyst expectations by 6% for earnings per share and by nearly 1% for revenue. Adjusted earnings per share grew 6% year over year, to $0.84, while sales grew 5% from a year ago, to $18.8 billion.

Comcast currently enjoys significant bullish sentiment on Wall Street, with 27 “buys,” four “holds,” and no “sells.” The consensus 12-month target price is $70.72, which suggests potential appreciation of 16.4% above the current share price.

Analysts forecast adjusted earnings per share will rise 9% this year, to $3.54, on sales growth of 6%, to $79.3 billion. Over the next five years, analysts project earnings growth of 11% annually.

Comcast’s yield, currently at around 1.8% on a forward basis, may not be all that enticing to yield chasers. But they’re leaving money on the table: The company has delivered staggering dividend growth, at nearly 21% annualized over the past five years. And it’s done so while generating strong free cash flow.

The company’s Cable division still has 22.4 million video customers, up by about 25,000 from a year ago. But as evidence of the evolving media landscape, that number is down about 7.4% from its peak in 2008.

Meanwhile, over the past 10 years, high-speed Internet subscribers have nearly doubled, to 18.1 million.

So distribution is still important, it’s just that the method of distribution is changing. But with consumers becoming untethered, ownership of must-watch content is becoming increasingly important.

Clearly, Comcast has recognized this reality and has adjusted its strategy accordingly. And with a high Utility Forecaster Safety Rating of 8, Comcast has the financial strength to continue doing so.