Something really strange has happened on the road to television’s future. Cord-cutting is not hurting cable and satellite TV providers.
Those companies seem to be more profitable than ever even though the number of pay TV subscriptions fell by 812,000 during the second quarter of 2016. The Los Angeles Times reported that the number of pay TV subscriptions in the US was 1.4 million lower in second quarter 2016 than in the same period a year earlier.
The losses are accelerating; during second quarter 2014, pay TV lost 291,000 subscribers, analyst firm SNL Kagan estimated. That means cord cutting increased by around 45% in just years.
It looks as if pay TV’s customer base is slowly disappearing but the strange thing is the industry seems to be making more money than ever. Financial data provided by ycharts indicates that cord cutting is not hurting revenues, cash flow and income at Pay TV providers.
Pay TV Providers are still making a Lot of Money
Now for the really strange part data from ycharts indicates that some of the largest pay-TV providers are making a lot of money. Some examples of this phenomenon include:
- AT&T (NYSE: T); which owns DirectTV reported revenues of $162.26 billion, a net income of $14.21 billion, a free cash flow of $4.837 billion and a profit margin of 8.41% on June 30, 2016. That gave the company a lot of float in the form of $7.208 billion in cash and short-term investments and $38.19 billion in cash from operations.
- Dish Network (NASDAQ: DISH) reported revenues of $15.14 billion, a net income of $870.94 billion, a profit margin of 10.7% and a free cash flow of $305.78 million on June 30, 2016. Like AT&T, Dish had a lot of flat with $3.487 billion in cash and short-term investments, $499.18 million in cash from financing and $2.54 billion in cash from operations.
- Comcast (NASDAQ: CMCSA) reported revenues of $75.97 billion, a net income of $8.129 billion, a profit margin of 10.52% and a free cash flow of $1.643 billion. Comcast generated a lot of float in the form $4.665 billion in cash and short term investments and $19.33 billion in cash from operations.
One pay TV provider that did lose money was Charter Communications (NASDAQ: CHTR) which reported $9.22 billion in revenues, a negative income of -$378 million, a negative profit margin of -7.43%, and a free cash flow of -$61 million in March 2016.. Charter did have quite a bit of float in the form of $1.278 billion in cash and short-term investments, $16.13 billion in cash from financing and $2.255 billion in cash from operations.
Pay TV’s Revenues are growing
What is even more surprising is that some pay TV companies’ revenues are growing in spite of the cord cutting.
Between June 2015 and June 2016, Comcast’s revenues grew by $1.1 billion rising from $18.23 billion to $19.33 billion. Meanwhile Dish Network’s revenues fell by $166 million during the same period dropping from $2.706 billion in June 2015 to $2.54 billion a year later.
AT&T’s revenues grew substantially rising by $29.27 billion; going from $132.99 billion in June 2015 to $162.26 billion a year later. Strangely enough Charter’s revenues grew from $9.439 billion in June 2015 to $9.922 billion in March 2016. That made for an increase of $483 billion.
Why are Pay TV revenues growing?
Okay so why are pay TV’s revenues growing in the face of cord cutting? My guess is that these companies have other revenue streams that benefit from cord cutting.
AT&T, Charter and Comcast are providers of high-speed internet which cord cutters need to access their Netflix (NASDAQ: NFLX) and Amazon Prime. Dish also sells satellite internet; which is not that great, but is the only way for a lot of rural residents to access digital television.
This means that the cord is not really cut. The customers simply change how they use the cord and what they get from it.
Cord cutting can also lead to higher profits for cable and phone companies because customers drop bundled packages and instead simply buy one higher cost product in the form of high-speed internet.
That might hurt Dish because its satellite internet is not necessarily that fast or reliable. I live in a rural area and I’ve heard a lot of people complaining about its reliability. A major problem is that service gets interrupted whenever a cloud passes between the orbiting satellite and the dish.
Is Pay TV a Value Investment?
Pay TV is obviously making a lot of money, but is it a value investment? Well at least one company in the sector is: AT&T.
AT&T delivered a dividend yield of 4.67% and a return on equity of 12.29% on June 30, and September 2, 2016. It was also underpriced at $40.86 a share on September 2, 2016. After all it is a company with assets of $401.81 billion and an enterprise value of $372.58 billion that had a market cap of $251.31 billion.
That means there is at least one value investment in pay television. If you’re looking for a great contrarian play check out AT&T it is making a lot of money and growing impressively despite all the cord cutting. AT&T is also poised to profit handsomely from cord cutting because of its Universe high speed internet service.
Cord cutting is not going to kill pay television or cable. Instead it is just going to change how those companies make money.