The rally in U.S. cable stocks has been strong, steady and sensible. The shares of the two largest companies in the space, Comcast and Time Warner Cable, had both returned about 40 per cent more than the broader market during the past year as of the end of last week. The outperformance is eminently reasonable. Comcast and TWC, with more than 30 million customers between them, have delivered revenue growth ahead of U.S. output. In their most defensive business – providing households and businesses with Internet connections – subscriber growth has been rock solid.
Things might look a bit different this week, however, after TWC reported its third-quarter results. Internet subscriber additions were hardly terrible, at 85,000 – but this was fewer new customers than in the third quarter of last year. This follows three quarters of increasing additions. At Comcast, by contrast, customer additions have been accelerating for several quarters, including the third. And TWC has lost significantly more pay-TV customers in the past year than Comcast, despite starting from a much smaller base. It looks, suddenly, like Comcast is the better way to ride the aging cable rally. Comcast's NBC Universal content business, which contributes a quarter of profits, is prospering, too.
TWC's third-quarter numbers should not be blown out of proportion. Its combination of growth, defensiveness and a reasonable if not bargain valuation (16 times this year's earnings, a bit cheaper than Comcast) remains attractive. It is also an exceptionally generous company with investors: during the past year it has returned almost every penny of its free cash flow in the form of dividends and share buybacks. Comcast has returned only a little more than half of the cash it has churned out. This may, however, represent another point in Comcast's favour. If the Internet subscriber growth story tails off, it can placate investors with more payouts. TWC has already pulled that lever about as hard as it can.