The Walt Disney Company (DIS) raises dividend, but ESPN concerns still exist.

Walt Disney’s (NYSE:DIS) dividend was increased by a solid 10% last week. Its overall yield is 1.58%. The firm has paid a dividend since 1957.

Walt Disney is a global entertainment company. Its primary business for nearly 100 years has been its Disney parks and resorts business. It owns and runs the Walt Disney World Resort in Florida and the Disneyland Resort in California. Disney also has a large media presence, operating media networks including ESPN, ABC, and Disney Channel, and several television production studios. Walt Disney owns the rights to some of the most globally recognized characters including Mickey Mouse, Donald Duck, Buzz Lightyear, and now the Star Wars franchise.  Its movie franchise is also a key element to earnings of the firm including film labels Marvel, Pixar, and now Lucasfilms.  The company was founded in 1923 and is based in Burbank, California.

Disney has maintained a solid three-year growth rate of dividends of 11.5 percent. Walt Disney currently ranks 6th in yield within the large cap services, entertainment category.

The semi-annual dividend for the January payment will be $0.78. Prior to 2015 dividend payments were made annually.

The dividend will be paid at the new higher rate on January 11, 2017, to shareholders of record at close of business on December 12, 2016. Listed in the table below are the dividend payments since 2010.

Date Dividends
12/12/2016 0.78
7/7/2016 0.71
12/10/2015 0.71
7/1/2015 0.66
12/11/2014 1.15
12/12/2013 0.86
12/6/2012 0.75
12/14/2011 0.6
12/9/2010 0.4

We examine Walt Disney upon our five key criteria, which include; 

Category Value Score
Dividend Yield 1.58% 327
Dividend Growth (3 to 6 year avg) 18.4% 37
Forward P/E 15.5  99
S&P Financial Rating A 120
Beta  1.00  125
Total Score   708

Additional quantitative information on P/S ratio and historical yield;

% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr lowest Yield % 5 yr max Yield %
1.58% 11.5% 24.2% 35.25 2.8 1.4 3.5 0.00% 1.89%

Positives;

  • Walt Disney maintains an investment grade credit rating and a current dividend yield (1.58%) above its five-year average of 0.95%.
  • Walt Disney has maintained a stellar six-year growth rate of dividends of 32.2 percent.

Negatives;

  • Walt Disney’s dividend yield is below that of the S&P 500 Index.
  • Walt Disney is trading above its ten-year average price/sales (P/S) ratio at nearly 3 times revenue.
  • Walt Disney had poor earnings & revenue results and continued bleeding from its ESPN division.
  • The company has an endless low dividend payout ratio.

Latest Earnings & Overall Analysis:

Walt Disney issued its earnings data on November 10th. Quarterly earnings per share were $1.10, missing expectations by 6 cents.  This was a drop of 8% in Q4 earnings over last year’s numbers. Revenue also fell by 2.7% to $13.14 billion, below estimates from analysts of $13.52 billion. More ESPN subscriber losses piles up. Estimates from Nielsen showed that the ESPN network had lost 621,000 subscribers in a single month.   The Worldwide Leader in Sports has reportedly lost 10 million subscribers since peaking at 99 million in 2013. The media segment had revenue of $1.4 billion, driven by lower results at ESPN and the Disney Channels.  ESPN’s lower advertising was due to less impressions and lower charged rates along with weaker affiliate station revenue. The media networks division delivered a 3% reduction in revenue while the cable network division dropped by 7%.  Larger production costs for Disney impacted results as both Olympics programming and World Cup of Hockey rights weighed on earnings.

The broadcasting division income was $224 million versus $175 million in estimates. Quantico and Golden Girls drove the solid results.   The prime business of Disney Parks had revenue gains of a mere 1%. This did miss consensus estimates by 7% as revenue came in at $699 million versus the $750 million expected. International parks were the weak point of the quarter, although U.S. park operations were strong. Disneyland Paris missed attendance marks although Shanghai Disneyland offered better results.

Within consumer products, revenue came in at $424 million. This also missed projections; ($434 million consensus). Disney’s Infinity console games business was shuttered in the prior quarter, impacting results. Merchandise licensing sales were sluggish. On the bright side, studio revenue rose 2%. Though that number was well below the Q3 results when Finding Dory was released. The film studios have really been the star for Disney over the last several years. In addition to Finding Dory, other successful films like Star Wars, Zootopia, and Captain America were released in the last twelve months.  Disney films grossed $7.5 billion at the box office last year alone.

Despite the mediocre results, management indicated that Disney will see modest EPS growth in fiscal 2017. The media conglomerate also projected accelerating growth beginning in 2018.  This is primarily due to the Star Wars franchise and a new theme park in Shanghai.   Management commented that domestic subscriber losses for ESPN have slowed down.   Management also pointed out that attendance at Shanghai was strong with 4 million new visitors for the first 4 months.

On the financial front, Disney remains a solid company with a A credit rating from S&P. As of September 30, 2016, the firm had total debt of about $20.2 billion, and with cash and equivalents of $4.6 billion.  Disney also gave guidance that it would repurchase $7 to $8 billion dollars worth of stock in 2017. Disney has reduced the number of shares from 2.076 billion to 1.639 billion in the last decade.

Disney is a unique company with one of the most coveted brand names on the planet. For the company to succeed, all parts of Disney must flourish. The acquisition of the Star Wars and Marvel Franchises were outstanding moves for the company. However, revenue from the division is quite lumpy, depending on the year and movies released. The firm produced over $9 billion in revenue last year as the firm had multiple hits including Frozen, Iron Man 3, Star Wars, and Finding Dory. However, revenue in 2012 was $5.8 billion and in 2008 revenue topped $7.3 billion.  This division is extremely profitable as well. So one big miss can result in not only reduced revenue, but a large hit on earnings.

ESPN continues to be the key to Disney’s stock performance in the next few years. ESPN had 92 million subscribers in 2015 versus 99 million in 2013.  ESPN is the jewel in its media arsenal. The station dominates sports television with substantial rights to college football, MLB, MBA, and NFL programming.  It is also a live TV product, which makes it less immune to DVR recording.  The largest issue for Disney going forward is the ESPN franchise. It accounts for a quarter of all profits.  Although subscribers have declined in the U.S., ESPN has offset this by increasing subscriber rates for cable providers. ESPN simply charges one of the highest rates of any station due to its premium product lineup.

At present, ESPN does have the advantage, especially with the unique sports programming lineup it has control over.  But ratings for ESPN have been declining for years. ESPN’s SportsCenter was averaging 479,000 viewers across all telecasts, down nearly 30,000 from the same period in 2015.  That said, the product cannot be duplicated. Not with the long-life contracts ESPN has signed with the major sports leagues.  Disney has the prestigious  Monday Night Football program locked up for another five years. Although the deal is very expensive at $2 billion per year, it offers a strong block for any carrier attempting to drop ESPN from its lineup. On the positive side, Disney’s ESPN gained 12 million international subscribers last year. But, whether of not the new deals with AT & T/DirecTV, Hulu, and Sling can attract enough elusive millennials to view ESPN will now be a continued focus throughout the next few years.

Disney trades at a modest price/earnings ratio of 15.5 times our estimate of $6.50 for 2017. However, it does trade at near 3 times sales, much higher than the 1.5 times sales it traded for in 2011. Its dividend yield is also below that of the S&P 500. The dividend payout ratio increased slightly from 16% in 2006 to 24% today, but is still too low. Thus, based on the firm’s lower than average dividend yield, scant payout ratio, high price/sales ratio, ESPN subscriber growth concerns, Walt Disney does not qualify as a member of our  Top 100 Dividend Stocks

The Walt Disney Company Dividend Yield Chart (Click to enlarge)

dis3

Chart Explanation:  Dividend growth stocks may be viewed favorably when the current yield is above historical readings for the past 5 years.

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