Welcome to the Stock of the Day.
Earlier this week we received big news regarding the cable M&A race: Comcast (CMSA) announced plans to buy its largest competitor, Time Warner Cable (TWC). This has huge implications for the internet and cable industry, so let’s review the deal and see if there are any buying opportunities here.
Time Warner Cable is a name you’re probably familiar with. It is the second-largest cable operator in the U.S., offering the usual services of video, high-speed data and voice over its broadband cable systems to residential and business customers. It serves 15 million customers in the Carolinas, New York, Ohio, Southern California and Texas.
Comcast agreed to buy out Time Warner Cable in a $45.2 billion stock-for-stock deal. The deal values TWC at $158.82 per share, a nearly 10% premium over yesterday’s closing price. Once the deal closes later this year, TWC shareholders will own nearly a quarter of Comcast’s common stock.
With Time Warner Cable under its control, Comcast will now have access to 11 million additional residential subscribers. The transaction is also expected to generate $1.5 billion in savings for Comcast and increase free cash flow per share.
Now, because this would combine the country’s No. 1 and No. 2 cable companies, this deal is going to attract the scrutiny of the FCC and antitrust regulators. Even so, TWC shareholders clearly favor the deal as shares popped this morning following the announcement.
Time Warner Cable pays out a nice 2.1% annual dividend yield—the third highest in the CATV Systems industry. The stock next goes ex-dividend on February 26. Shareholders of record will receive 75 cents per share on March 17. This payment represents a 15% hike over last quarter’s dividend. Time Warner cable is also known for its hefty stock buyback programs. Between dividends and stock buybacks, Time Warner returned $3.3 billion to shareholders during FY 2013.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Now, if you go to the stock report page for TWC, you’ll see that this Conservative stock currently receives an A-rating. To be clear, that reflects the stock’s Portfolio Grader rating before the Comcast acquisition was announced. Now that there’s going a stock swap, current TWC shareholders can decide to either continue holding their shares or take profits. In any event, I don’t recommend adding any more shares at this time.
Bottom Line: As of this post I consider TWC a Hold.
Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!