The S&P 500 just wrapped up one of its worst years of all time.

It fell by nearly 20% for 2022.

If you’re focused on short-term stock pricing, this is terrible.

But if you’re instead looking at long-term business results, it’s not really a big deal at all.

Many businesses are actually holding up just fine, especially those paying growing dividends.

Yes.

Businesses paying growing dividends kind of have to hold up well.

Otherwise, it’s awfully difficult to pay growing dividends.

Cash dividends are akin to “proof of profit”.

Growing dividends, thus, are proof of growing profit.

This simple concept is at the heart of dividend growth investing.

It’s a strategy whereby you buy and hold shares in high-quality businesses paying safe, growing dividends.

You can see what I mean by checking out the Dividend Champions, Contenders, and Challengers list.

This list has compiled important data on hundreds of US-listed stocks that have raised dividends each year for at least the last five consecutive years.

I’ve been adhering to this strategy for more than ten years.

It helped me to retire in my early 30s.

My Early Retirement Blueprint explains exactly how that happened.

Suffice it to say, if you want to quit your job and retire early, you’ll have to replace job income with another source of income.

And I can think of few sources of income better or more passive than dividend income, which is exactly why I’ve chosen to live off of dividends.

Except I don’t just live off of dividends.

I live off of growing dividends.

I’ve been building the FIRE Fund over the last decade or so.

This is my real-money portfolio, and it produces enough five-figure passive dividend income for me to live off of.

The dividend growth investing strategy is extremely powerful, if you properly apply it.

One of the ways in which it’s properly applied is by being mindful about valuation at the time of investment.

Whereas price is what you pay, value is what you end up getting.

An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.

This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.

Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.

That higher yield correlates to greater long-term total return potential.

This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.

And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.

These dynamics should reduce risk.

Undervaluation introduces a margin of safety.

This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.

It’s protection against the possible downside.

Paying more attention to long-term business results than short-term stock prices, which is a lot easier when you’re routinely buying undervalued shares in high-quality businesses paying growing dividends, sets you up for tremendous investment success over the long run.

Is this easier said than done?

Isn’t it difficult to actually value a business.

Well, it’s not as difficult as you might think.

And I know of a resource that can make it even easier.

Fellow contributor Dave Van Knapp’s Lesson 11: Valuation, which is part of an overarching series of “lessons” on dividend growth investing, lays out a valuation template that you can apply to almost any dividend growth stock out there.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

Comcast Corporation (CMCSA)

Comcast Corporation (CMCSA) is a media and entertainment conglomerate with interests in cable, broadcasting, film, streaming, live entertainment, and theme parks.

Founded in 1963, Comcast is now a $151 billion (by market cap) media giant that employs nearly 190,000 people.

The company reports operations across five segments: Cable Communications, 53% of FY 2021 revenue; Media, 19%; Sky, 16%; Studios, 8%; and Theme Parks, 4%.

Cable Communications consists of the operations of Comcast Cable. Comcast Cable provides 17.5 million cable video connections, 30 million high-speed internet connections, and 9 million voice services.

Media consists of NBCUniversal’s television and streaming platforms. This includes a variety of cable networks, the NBC broadcast network, the Telemundo broadcast network, certain television stations, and Peacock.

Sky consists of the operations of Sky. Sky is a leading European entertainment company that provides video, broadband, voice, and wireless phone services. It is also a major content producer, via the Sky News broadcast network and Sky Sports networks.

Studios consists of NBCUniversal’s film and television studio production and distribution operations. Universal Pictures is one of the five major US film production studios.

Theme Parks consists of the worldwide Universal theme parks.

Comcast also has other business interests that consists primarily of the operations of Comcast Spectacor, which owns the Philadelphia Flyers and the Wells Fargo Center arena in Philadelphia, Pennsylvania.

Comcast is a perfect example of why you should be paying more attention to long-term business results than short-term stock pricing.

If you’re only looking at the latter, you’d think Comcast was in real trouble.

After all, its stock fell by about 30% in 2022.

However, that’s a near-term market sentiment issue, not an issue with the actual state of the business.

Indeed, Comcast has been growing healthily.

This is in spite of the narrative around “cord cutting”, as consumers shed cable TV subscriptions in favor of streaming options.

The key to Comcast’s growth revolves around broadband.

FY 2021 saw 1.1 million net additions to total customer relationships across Cable Communications, largely thanks to broadband.

This is central to the investment case for Comcast.

Reliable, high-speed access to the Internet is more important than ever.

After all, that streaming content gets streamed over the… wait for it… Internet.

And that’s part of an overall shift to more data consumption, supercharged by more people working from home.

This requires the “digital pipes” that Comcast owns.

See, Comcast is the largest provider of broadband connectivity in the United States.

Due to this, Comcast actually retains a lot of consumer spending.

It’s just that there’s a shift in the spending – less cable TV; more broadband.

Streaming has definitely accelerated this shift, but streaming isn’t necessarily the bane of Comcast.

That’s because Comcast is becoming a force of their own in streaming.

Peacock, which is Comcast’s streaming platform that was launched in 2020, recorded 24.5 million monthly active accounts in the US alone at the end of FY 2021.

Comcast is already a major player in the disruptive technology affecting their traditional cable television business.

Furthermore, Comcast is a lot more than its cable operations.

It’s a global media and entertainment juggernaut.

Thanks to broad diversification and a stranglehold on broadband in the US, Comcast continues to grow its revenue, profit and dividend year in and year out.

Dividend Growth, Growth Rate, Payout Ratio and Yield

To date, the company has increased its dividend for 14 consecutive years.

The 10-year dividend growth rate is a brisk 14.2%.

However, more recent dividend raises have been in the 8% range.

With the payout ratio at only 30%, based on TTM adjusted EPS, the dividend is healthy and in a good position to continue rising by 8% or so annually.

Along with that high-single-digit dividend growth, you get the stock’s current market-beating yield of 3%.

That yield, by the way, is 90 basis points higher than its own five-year average.

I like dividend growth stocks in what I refer to as the “sweet spot” – a yield of between 2.5% and 3.5%, paired with a high-single-digit (or higher) dividend growth rate.

Rarely do I see something that’s so dead center in the sweet spot.

It’s really quite remarkable.

Revenue and Earnings Growth

As remarkable as these dividend metrics may be, many of the numbers are looking in the rearview mirror.

However, investors have to look through the windshield, as they’re risking today’s capital for tomorrow’s rewards.

Thus, I’ll now attempt to build out a forward-looking growth trajectory for the company, which will be instrumental when later estimating the company’s intrinsic value.

I’ll first show you what this business has done over the last decade in terms of its top-line and bottom-line growth.

I’ll thereafter uncover a professional prognostication for near-term profit growth.

Fusing the proven past with a future forecast in this way should give us the ability to paint a picture of what the company’s future growth path might look like.

Comcast increased its revenue from $62.6 billion in FY 2012 to $116.4 billion in FY 2021.

That’s a compound annual growth rate of 7.1%.

I like to see at least a mid-single-digit top-line growth rate from a mature business like this.

Comcast delivered.

Meantime, earnings per share rose from $1.14 to $3.04 over this period, which is a CAGR of 11.5%.

Top-line growth was very good.

Bottom-line growth is even better.

This perfectly illustrates the difference between the narrative around cable companies and the reality of the actual business results.

The narrative is that cord cutting is a trend that is slowly killing these companies.

The reality, however, is that there’s simply a shift in spending toward higher-margin, higher-growth broadband offerings.

Indeed, margin expansion helped to drive some of this excess bottom-line growth.

Routine buybacks also helped.

Regarding the latter point, Comcast reduced its outstanding share count by approximately 14% over this 10-year period.

Looking forward, CFRA believes that Comcast will compound its EPS at an annual rate of 10% over the next three years.

CFRA sees “favorable mix shifts to high-margin connectivity businesses as well as growth in high-speed data and business services.”

That says it all for me.

Comcast is becoming less about cable TV and more about broadband.

CFRA further backs up this viewpoint: “We think Comcast’s year-to-date results in 2022 have shown a firming recovery path for NBCU’s advertising, TV/film content, and theme parks businesses — benefiting from pent-up demand. Meanwhile, with the cable broadband business recently riding some demand tailwinds, the company has increasingly pivoted to a broadband-led connectivity strategy and gained significant traction in its nascent wireless offering.”

Unless you believe that society will demand less broadband connectivity in the future, it’s hard to bet against Comcast.

After all, the company often runs local monopolies, being the only major company offering broadband in many of its markets.

Rising demand.

Limited supply.

That’s a recipe for making a lot of money.

And I think it’s the recipe that Comcast will be using to continue increasing the dividend annually in that 8% range, supported by this anticipated 10% CAGR in EPS over the near term.

When you’re already starting off with a 3% yield, that’s an awfully compelling total package.

Financial Position

Moving over to the balance sheet, Comcast has a so-so financial position.

The long-term debt/equity ratio is 1.0, while the interest coverage ratio is above 5.

This is an asset-heavy, capital-intensive business model, which explains the balance sheet.

I see the indebted nature of Comcast as one of its biggest weaknesses.

Profitability, however, is robust, and it’s been improving.

Over the last five years, the firm has averaged annual net margin of 14.3% and annual return on equity of 19.2%.

To circle back around to the point I made earlier on margin expansion, Comcast was routinely printing net margin in the 10% area 10 years ago.

Fundamentally speaking, despite the narrative around the “death” of cable companies, this is actually a great business.

Other than the chink in the armor that is the debt load, Comcast is running an impressive operation.

And with economies of scale, high barriers to entry, and the ability to operate as a local monopoly in many markets, the business does feature durable competitive advantages.

Of course, there are risks to consider.

Regulation, litigation, and competition are omnipresent risks in every industry.

While the industry at large is fiercely competitive, Comcast benefits from often being the only major player in any given market.

I’d argue that the consternation over the “cord-cutting” trend is exaggerated when looking at the totality of operations, but cable video disconnections disproportionately harm the company because of a “double whammy”: This hurts both the distribution side (through cable video) of the business and the production side (through cable networks) of the business.

Comcast also faces technological obsolescence risk, with competitors constantly trying to bring better, cheaper, and/or faster options to market (e.g., 5G wireless, LEO satellites).

The indebtedness limits the company’s future flexibility in terms of M&A and network buildouts.

Comcast also has a poor reputation for customer service.

I think these risks are worthy of being carefully weighed over, but the weight of the valuation should also be considered.

With the stock down about 30% from its 52-week high, the valuation looks about as attractive as it ever has…

Stock Price Valuation

The P/E ratio is 10.2, based on TTM adjusted EPS.

That’s obscenely low for this growth rate.

That puts the forward PEG ratio at almost exactly 1, based on CFRA’s near-term EPS CAGR number.

The P/CF ratio, which is an extremely low 5.9, is also well off of its own five-year average of 7.8.

And the yield, as noted earlier, is significantly higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a dividend discount model analysis.

I factored in a 10% discount rate and a long-term dividend growth rate of 8%.

That DGR is at the high end of what I allow for, but I’m not sue why Comcast wouldn’t deserve it.

The company has been raising the dividend at a much higher rate than this over the last decade.

Even the most recent dividend raise came in at 8% on the nose.

And the payout ratio is still quite low.

With EPS growth expected to come in higher than this number over the foreseeable future, it seems very likely to me that Comcast will have the wherewithal to continue increasing the dividend at the level it’s been committed to.

The DDM analysis gives me a fair value of $58.32.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

Based on my reasoned analysis, this stock looks cheap to me.

But we’ll now compare that valuation with where two professional stock analysis firms have come out at.

This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates CMCSA as a 5-star stock, with a fair value estimate of $60.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates CMCSA as a 4-star “BUY”, with a 12-month target price of $50.00.

I came out closer to where Morningstar is at on this one, but we all see severe undervaluation here. Averaging the three numbers out gives us a final valuation of $56.11, which would indicate the stock is possibly 53% undervalued.

Bottom line: Comcast Corporation (CMCSA) is running a great business, despite the narrative around the “death” of cable companies. Demand for high-speed internet connectivity is still very high, which bodes well for the company. With a market-beating yield, a double-digit long-term dividend growth rate, a low payout ratio, more than 10 consecutive years of dividend increases, and the potential that shares are 53% undervalued, Comcast appears to be an exceptional deal for long-term dividend growth investors.

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Note from D&I: How safe is CMCSA’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 89. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, CMCSA’s dividend appears Very Safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.

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Source: Dividends & Income