Comcast (CMCSA) has rallied ~60% off its lows of almost one year ago. Nevertheless, the company has promising growth prospects ahead thanks to a continued recovery in the economy.

Comcast has registered strong growth over the past several years, while also paying a dividend that currently yields 2%. Because of this, the stock is a popular holding among retail dividend growth investors, as well as institutions such as Eagle Capital Management.

There is a common strategy for buying stocks which is known as "growth at a reasonable price." Comcast certainly fits this investing strategy, as it has strong growth prospects, a market-beating dividend yield, and a reasonable valuation.

Business Overview

Comcast is a media, entertainment, and communications company. Its business includes cable communications (high-speed internet, video, business services, voice, advertising, wireless), NBCUniversal (cable networks, theme parks, broadcast TV, filmed entertainment), and Sky, a leading entertainment company in Europe that provides video, high-speed internet, voice, and wireless phone services directly to consumers.

Comcast has been affected by the coronavirus crisis, which has hurt the businesses of NBCUniversal and Sky, particularly the filmed entertainment segment and the theme parks due to the social distancing measures taken against the pandemic. Due to the impact of the pandemic on its business, Comcast incurred a decline in its earnings in 2020 for the first time in a decade.

In the fourth quarter, Comcast's total revenue fell 2%, its adjusted EBITDA declined 15% and its earnings per share fell 29% over the prior year's fourth quarter. On a positive note, Comcast added 538,000 net new broadband customers and grew the EBITDA of its cable business by 12%.

In addition, its theme parks in Orlando and Osaka reached their break even point, thus confirming that they are in recovery mode. Nevertheless, Comcast posted a 17% decrease in its adjusted earnings per share in the full year 2020. Still, we expect the company to return to growth in 2021 as the economy recovers.

Growth Prospects

The massive vaccination program is currently underway, which will hopefully end the pandemic in the second half of 2021. As a result, Comcast is likely to return to its reliable growth trajectory later this year.

The cable segment is likely to remain a significant growth driver for the foreseeable future thanks to growth in the customer count and rate hikes. The video operation is battling against the impact of cord-cutting, but so far higher revenues in the high-speed internet business have more than offset this headwind.

Overall, we expect Comcast to grow its earnings per share at a 7.0% average annual rate over the next five years, from $2.61 in 2020 to $3.66 in 2025. This would be comprised of revenue growth and share repurchases. The company also pays a dividend to shareholders.

Comcast has raised its dividend for 12 consecutive years and is a dividend achiever. It is not a high-yield stock with a current yield of 2%, but the low dividend yield has resulted from the steep rally of the stock price and its low payout ratio, which currently stands at 38%.

Given its strong balance sheet, the company could offer a much higher dividend but it prefers to preserve cash for greater financial flexibility. Overall, thanks to its promising growth prospects, its healthy payout ratio and its strong balance sheet, Comcast can easily continue raising its dividend meaningfully for many more years.

Valuation & Expected Return

Comcast is currently trading at a price-to-earnings ratio of 19.5, which is higher than the historical average price-to-earnings ratio of 16.1 over the last decade. We estimate a fair value price-to-earnings ratio of 15.0 for the stock, just to be on the safe side in the event of a prolonged pandemic. If the stock trades at our assumed fair valuation level in five years, it will incur a 5.2% annualized drag in its returns due to the contraction of its valuation level.

Given also the aforementioned 7.0% expected earnings-per-share growth and its 2.0% dividend yield, Comcast is likely to offer just a 3.7% average annual total return over the next five years. Therefore, investors should probably wait on the sidelines for a more attractive entry point. On the other hand, those who are comfortable with the current valuation of the stock thanks to its growth potential may consider purchasing the stock even around its current all-time high level.

Final thoughts

Comcast has an exceptional growth record and still has ample room for future growth. Thanks to its growth potential, the stock may reward even those who purchase it around its current all-time high level. Value investors may want to wait for a more opportune entry point in order to enhance their margin of safety, but the stock should continue to deliver steady dividend increases for many years.