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Comcast is one company not being stingy with its cash Print E-mail
Friday, 04 December 2009

By Matthew Quinn

While other companies are hoarding cash, at least one seems abundantly confident in the strength of its cash flows.

To help appease shareholders worried about its deal to take control of NBC Universal, Comcast announced on Thursday that it was raising its dividend by 40 percent and accelerating its share repurchase programs.

The cable operator will purchase a 51 percent stake in a joint venture with General Electric for about $7 billion of cash. Prior to Comcast's purchase, the venture is expected to incur new debt of about $9 billion, the proceeds of which will be distributed as a dividend to GE.

Analysts seem to think Comcast can pull off the venture without adding much stress to its balance sheet. In announcing that it had affirmed Comcast's credit rating following the acquisition, Moody's Investors Service said it "believes that the attractiveness of NBCU to Comcast lies in the large and stable cash flows which it generates from its profitable collection of cable programming assets."

Of course, not everyone agrees that this is the best use of cash to begin with. "This is a company that generates $4 billion or $5 billion a year in free cash flow and they're giving us back a fraction," Virge Trotter, a senior analyst at Manning & Napier Advisors, which owned 12.1 million shares as of Sept. 30, told Bloomberg in regard to the dividend increase and share repurchase plan. "It's kind of a token compared to how much cash flow we could be getting back."

Given those strong flows, Comcast doesn't sit on a lot of cash. It held only about $900 million in cash, cash equivalents and investments as of Sept. 30. However, it produced cash flows of $7.7 billion from operating activities through the first nine months of 2009. Of that, $4.7 billion was used to pay down debt and $3.5 billion went toward capital expenditures. Comcast is already sitting on $28.5 billion in long-term debt.

Moody's expects that Comcast will fund the cash portion of the deal with cash on hand, existing credit facilities, new financing and a portion of free cash flow generated at the joint venture between signing and closing. Moody's projects that Comcast's pro forma stand-alone leverage excluding the venture will approximate 2.7 times Ebitda for 2010 and fall to about 2.2x by 2012, which is comfortably below the 2.5x leverage level previously incorporated into Comcast's current rating.

Still the deal will significantly change the company on a fundamental level.

"Margins will decline dramatically as the NBC Universal assets are much less profitable," GimmeCredit analyst Dave Novosel wrote in a note to investors. "Although the deal does not cause significant damage to the credit profile, leverage will increase while margins decline."

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