Andrew Bary

Charter Communications is in a bind.

The company has a weak stock, one of the lowest price/earnings ratios in the S&P 500, ample free cash flow, and a mountain of debt.

What should it do? The company's answer has been to buy back lots of stock. But that approach so far has been a disaster.

An alternative, paying a big dividend, could be a better option. Charter, the No. 2 cable and broadband provider in the country behind Comcast, could pay a 10% dividend and still have plenty of free cash flow for either stock repurchases or repaying debt.

Doing so could boost the stock, which is down 40% this year at around $200, making it one of the worst performers in the S&P 500. The shares have fallen more than 75% from their peak of more than $800 in 2021. They are below where they stood a decade ago.

Media mogul John Malone, whose Liberty Broadband has effective control of Charter, has long been a champion of stock repurchases. But he suggested recently that Charter might emulate Verizon Communications and pay a sizable dividend.

Liberty Broadband owns about 25% of Charter stock and has a deal to be purchased by Charter. Charter also has agreed to buy cable and broadband provider Cox Communications. Both are expected to close in 2026.

Malone raised the issue at Liberty Media's Nov. 20 investor day and then in a CNBC interview.

"So I believe that they've got to rethink the return of capital at Comcast and at Charter...do they believe they got a business that can pay a sustainable dividend," Malone told CNBC. "And if they do, they may have to do like Verizon, which carries a higher valuation than the cable guys and pays out almost all of its free cash flow as a dividend."

Pivotal Research Group analyst Jeff Wlodarczak wrote after Charter's disappointing third-quarter earnings report in late October that management "should seriously consider initiating a sizable regular dividend." He said the dividend yield could be in the "low teens" with the remainder of the company's free cash flow earmarked for debt reduction.

Charter hasn't paid a dividend since its inception 15 years ago. Comcast, by contrast, pays a 5% dividend on its depressed shares.

Charter, which declined to comment, is expected to generate about $5 billion of free cash flow this year, or about $36 a share. That figure roughly equals its projected earnings.

With declining capital expenditures in the coming years, Charter has talked about potentially generating $9 billion in free cash flow annually, possibly in 2028.

Here's some simple math. If Charter paid a dividend of $20 a share, roughly half its free cash flow, its stock would yield 10%. Given that investors value dividends, the shares could trade higher.

Under the same 50% payout scenario, the dividend could rise to $30 a share in the coming years if management's outlook for free cash flow pans out.

Verizon stock, trading at around $40, has a nearly 7% yield. It pays out close to 60% of earnings.

Charter has the second-lowest price/earnings ratio in the S&P 500 index, trading for just five times projected 2026 earnings. Only the drug maker Viatris, at about 4.5 times, has a lower P/E ratio.

Part of the problem is that Charter is caught up in the battle between cable and telecom companies over the market for internet service. AT&T and Verizon Communications are rolling out broadband services using fiber. Another threat is so-called fixed-wireless, or low-cost internet services using wireless spectrum.

Investors fear the business is slowly eroding. Charter lost 1.5% of its broadband subscribers over the year ended in the third quarter. The potential for softer pricing is another concern.

Malone lamented the competitive landscape for internet service, telling CNBC that there is "way too much capex going in, competing for what is essentially a matured business."

Charter's total revenue fell 1% year over year in the third quarter to $13.7 billion. Adjusted earnings before interest, taxes, depreciation, and amortization came in at $5.6 billion, down by the same percentage.

Compounding the situation for Charter is its high leverage. It has about $95 billion of debt, about four times its annual Ebitda, with an equity market capitalization of less than $30 billion. Its leverage ratio is double that of Comcast.

Some Charter debt now yields close to 7%, reflecting concern among investors. That compares with a 5% yield on Comcast debt.

But the company's capital allocation strategy has been to use free cash flow mainly to buy back stock, rather than to pay down debt. Malone has long preferred buybacks over dividends as a tax-efficient way to return capital to shareholders.

The buyback strategy has been terrible for Charter. The company has repurchased $78 billion of stock since 2016 at an average price of $441, double the current share price, according to a presentation accompanying i ts third-quarter earnings release. The lack of a dividend has made things worse for investors, and some have slashed their holdings.

Berkshire Hathaway now owns a million shares, down from 5 million at the end of 2019. Like Charter, Verizon stock also is down over the past decade but Verizon holders at least have benefitted from an ample dividend.

Some analysts see hope for the stock.

Analyst Craig Moffett of MoffettNathanson Research, who noted after the earnings report that the company is "quietly going private" as it steps up the pace of stock repurchases, also wrote that the stock is valued at just a "2x P/E ratio on 2028" estimated earnings.

"Yes, you read that right," he said.

Charter boosted its repurchases in the third quarter to 7.6 million shares, or nearly 5% of the share count and the highest quarterly figure since 2022. Moffett remains bullish with a Buy rating.

Charter has one of the highest levels of short interest relative to its float in the S&P 500, indicating bearish sentiment. But if the narrative becomes more positive, there could be pressure on Charter shorts to cover.

Charter has proven to be a value trap, but it is worth a look from value investors. The valuation is at rock bottom, the franchise is still durable, and a big dividend could be on the way.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

November 26, 2025 15:25 ET (20:25 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.