Cablevision Systems Corporation (CVC), is a top-10 U.S. cable multiple system operator (MSO) with approximately 2.8 million video customers in and around the New York metropolitan area as of the end of 2013. In addition to cable services, Cablevision also provides high-speed data and voice over internet protocol services. Cablevision provides business data, internet, voice and video services through its wholly owned subsidiary Lightpath and 97.2% ownership of Newsday, a newspaper publishing business.
Cablevision operates these businesses through three reporting segments: Cable, Lightpath and Other. The Other business segment includes NewsDay, the News 12 Networks, Cablevision Media Sales, MSG Varsity and certain other businesses and un-allocated costs. Each segment has multiple competitors including telephone companies (E.g.: Verizon (VZ), AT&T (T)), satellite-delivery networks (E.g.: Dish Network (DISH) and Direct TV (DTV)), internet based programming, and broadcast television.
Cablevision has not seen substantial revenue growth for years, with five-year average revenue growth of negative 11% from $7.2 billion in 2008 to $6.4 billion over the trailing twelve months. During this time, Cablevision has had several significant acquisitions and divestitures, but none of which have been able to move the sales needle in the net positive direction. Although sales have been in decline Cablevision has been able to grow net income from $286 million to $530 million over the same period, which has helped drive earnings-per-share growth.
CVC – Earnings Summary
In January, Cablevision announced that fourth-quarter 2013 earnings dropped 53% on increasing revenue. Total customers declined by 7,000 for the quarter as declines in video customers offset gains in high-speed data customers.
The first-quarter of 2014 showed significant improvement with Cablevision reporting revenue growth of 4.3% to $1.58 billion and earnings of $89.8 million or $0.33 a share. These numbers significantly exceeded analyst consensus estimates of $1.56 billion in revenue and $0.03 earnings per share. Total customers continued to decline as the loss of video customers was mostly offset by gains in broadband customers with a net 2,000-customer loss for the quarter.
In the second quarter, Cablevision continued to shed subscribers, losing 21,000 from the previous quarter, but increasing revenue 3.7% to $1.63 billion driven by higher advertising revenue, — up 12.2% from last year — rate increases and a disciplined pricing strategy in the face of heavy discounting by competitors.
CVC – Subscriber Losses Will Not Effect Dividend
Cablevision has a price to earnings ratio of 16.9, which is below my P/E threshold of 20 for any dividend stock. Cablevision’s annualized dividend has increased on average 8.45% (from $0.20 in 2008 to $0.60 today) while EPS have increased 15.58% ($0.96 in 2008 to $1.98 on a trailing twelve-month basis). For any serious dividend stock, I look for dividend growth to approximate earnings growth and in this case, Cablevision does not make the mark. Cablevision’s current dividend yield of 3.4% is above my 3% threshold and has a 56% dividend payout ratio, below a 60% payout ratio ceiling.
With industry consolidation on the rise, rumors have been persistent that a larger rival may acquire Cablevision. Although the stock has exhibited peaks and valleys throughout the year price appreciation has significantly unperformed the S&P 500.
Analyst have 12-month consensus stock price of $18.5, which approximates its current trading range, but with a beta of 0.67, there is lower risk of volatility. Income investors should look to Cablevision as a good long-term buy with potential upside if Cablevision is acquired. Long-term deterioration of Cablevision customer base is slow and can be stunted with new product introductions holding limited risk that the dividend will be cut in the near to mid-term.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
