Top picks 2013: Time Warner Cable

The cable operator offers a 'triple play' of earnings growth, yield and P/E expansion.

By TheStockAdvisors Jan 5, 2013 1:30PM
Cable technician installing equipment on the side of a house Huntstock Huntstock Getty ImagesBy Stephen Quickel, US Investment Report

My top conservative stock pick for 2013 is Time Warner Cable (TWC), the second-largest cable multi-service operator in the U.S.

Its strengths are many, including strong anticipated earnings and revenue growth as well as its impressive profit returns and cash flow. The company is expected to grow earnings by 16% to 17% a year, trades at modest price-to-earnings and P/E to growth (PEG) ratios, and pays a 2.3% dividend yield to boot.

The company provides video, high-speed data and voice services over broadband cable systems to 15 million business and residential customers in New York, Texas, Ohio, southern California and the Carolinas.

In 2012 it acquired Insight Communications, adding 760,000 customers. If its current bid to buy the Optimum West business unit of Cablevision Systems is successful, it will add 300,000 more customers from Montana and Wyoming to Colorado and Utah.

So-called "Triple Play" bundling of cable, voice and Internet service in varied price packages has contributed significantly to customer base and revenue growth and generous bottom line profitability. Operating margins are in the 36-37% range with a 20% return on shareholders equity.  

In 2012 the company began paying a $0.40 quarterly dividend on its common stock, which was raised to $0.48 in 2011 and to $0.56 at the start of 2012. That annual payout rate of $2.24 brings TWC's yield to 2.3%.

Add that yield to the stock's earnings-fueled price appreciation and you have a shot at a potentially handsome total return. Time Warner has also used its ample free cash flow to buy back common shares and reportedly intends to continue to do so. 

In a sense, Time Warner Cable is a potential stock market "triple play" -- offering earnings growth, dividend income and possible expansion of modest P/E ratio.

The shares are a far from being overpriced. Of 31 analysts tracking the stock, 13 call it a strong buy and 10 rate it a buy. The median target price among Wall Street analysts is $111. Our own price target is $115.

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