When the internet was invented, it was said that this wasthe end for television. But it wasnt really the end of the age of television, but the beginning of the age of choice.
A highly profitable business
Remember when there were only five television channels? These days we are blas about there being hundreds of channels to choose from. Since the last century we have had the dawn of digital TV, widescreen television, high definition and3D. These days we can record TV andwe can rewind live TV. We have televisions thatcan connect with the internet andwhich can stream video; we have TVs thatproduceapicture so sharp you feel you are actually there.
BSkyB (LSE: BSY) has been at the forefront of these technological advances. This company has raised the bar, developing an offer thatadds to and complementsthe free services provided by the BBC and ITV.Plus it is now tying in its TV offer with broadband and phone calls.
Sky has now garnered over 10 million TV customers, plus millions more broadband and phone customers. The company has reached a critical mass, which means it is now churning out steadily increasing profits.
Consolidating in the UK and growing in Europe
BSkyBs main headwind is its battle with BT over sporting rights. The addition of an extra pay-tv competitor will definitely have an impact on profitability, and I think adds to the overall picture of a company whose growth in the UK is slowing, but whichis still generating a tonne of cash. After so many years ofexpansion, I think BSkyB is consolidating in this country.
Butwhile the company is consolidating in Britain, there is the prospect of BSkyBcreating aSky Europe by buying Sky companies in Germany and Italy. Sky has fewer customers in these two countries, so there are future growth opportunities, with the European companies drawing on BSkyBs strengths.
What about the fundamentals? Well, consensus estimatesa P/E ratio of 13.7, falling to 12.5, with a dividend yield of 3.8% rising to 4.1%. This indicates that the company is steadily growing, yet is reasonably priced. It is a highly cash-generative business thatproduces arising income. So, overall, I rate BSkyB a buy, particularly suited to dividend investors.
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I see companies such asBSkyB as ideal dividend investments, asthey combine share price growth with a rising dividend yield. In this way you have steadily increasing returns year after year, while minimising risk.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended British Sky Broadcasting. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
