Disney Stock Deserves Income Investors’ Attention
For income investors, it’s not easy to find value in today’s stock market. With the ultra-low interest rate environment for the most part of the last decade, investors rushed towards dividend stocks. As a result, the most well-known dividend growth stocks are now carrying bloated valuations.
However, if you are willing to dig into the not-so-hot sectors of the stock market, you can still find companies with dividend growth potential trading at reasonable prices. Walt Disney Co (NYSE:DIS) would be a good example.
Headquartered in Burbank, California, Disney is a multinational mass media and entertainment conglomerate. It operates through four main segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products and Interactive Media.
If you have been following the company, you would know that Disney stock has had quite a choppy ride in recent years. The stock fell quite a bit at the end of 2015, and didn’t really recover until a year later. Most recently, bearish sentiment started building up again, as Disney shares tumbled seven percent over the last three months. That’s quite a drop considering that Disney is a well-established company commanding nearly $170.0 billion in market cap.
It didn’t help the case when Disney’s chief executive officer, Bob Iger, presented at the Bank of America Merrill Lynch 2017 Media, Communications and Entertainment conference in Los Angeles on Thursday. In particular, he said that Disney’s earnings for the current fiscal year would be “roughly in line” with the results from the previous year. (Source: “Disney shares drop 4 percent after CEO Iger warns profits will be the same as last year,” CNBC, September 7, 2017.)
Disney stock fell more than four percent following Iger’s comments.
Now, I know what you are thinking: that dividends come from a company’s bottom line. Without a growing business, how can Disney stock be worth considering for dividend growth investors?
Well, first of all, Disney is not really paying out all that much. Even with its current state of operations, the company has the potential to pay much more substantial dividends.
Low Payout Ratio
When analyzing a company’s dividends, a key metric to consider is dividend payout ratio. It is calculated by dividing the annual dividend per share by the company’s earnings per share. In Disney’s fiscal year 2016, the company generated earnings of $5.73 per share while declaring total dividends of $1.42 per share. That translated to a payout ratio of 24.8%. (Source: “The Walt Disney Company Reports Fourth Quarter And Full Year Earnings For Fiscal 2016,” Walt Disney Co, November 10, 2016.)
In other words, the company was paying out less than a quarter of what it earned. This leaves a wide margin of safety and potential for a future dividend increase.
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Secondly, Disney is a company that’s willing to return value to shareholders through dividends.
You see, there are many profitable businesses, but not every company has a dividend policy. Some may reinvest their earnings, while others choose to return value to investors through share buybacks.
Disney, however, has been focusing on increasing its dividend payout. The company switched from paying annual dividends to semi-annual dividends in 2015. Moreover, it has raised its payout every year since 2009. The chart below shows Disney stock’s annual dividends over the past five years.
Disney Stock: Growing Dividends
Source: “Walt Disney Company Dividend Date & History,” NASDAQ, last accessed September 7, 2017.
From $0.75 per share paid in 2012 to $1.49 per share in 2015, Disney’s annualized dividend per share has nearly doubled in the last five years.
A New Catalyst?
While Disney’s earnings growth for the current year may be less than what Wall Street was anticipating, the company could get a new catalyst in the near future.
Last month, Disney announced that it would acquire majority ownership of BAMTech LLC, a direct-to-consumer video streaming technology company. Disney would also launch its ESPN-branded sport video streaming service in early 2018 and a new Disney-branded streaming service in 2019. (Source: “The Walt Disney Company to Acquire Majority Ownership of BAMTech,” Walt Disney Co, August 8, 2017.)
Furthermore, Iger recently said that Disney’s popular Marvel and Star Wars films will be featured exclusively on Disney’s upcoming streaming service.
“I have described a very rich, treasure trove of content for this app,” he said. “We’re going to launch big, and we’re going to launch hot.” (Source: “Disney CEO Announces Star Wars and Marvel Movies to Be Part of Streaming App,” TheStreet, September 7, 2017.)
Ronald Yang/Unslpash
This could be a big deal for Disney stock. On-demand video streaming services have grown tremendously over the last several years, and different streaming platforms have been fighting for content. While Disney is kind of late to the game, its widely followed movie franchises could translate to a sizable subscriber base once the streaming service is launched.
Therefore, Disney stock is far from over. With a low payout ratio and a rock solid business, the company will likely reward shareholders with increasing dividends in the years to come. And with the recent downturn in its share price, the company is trading at very attractive valuations. At $97.06 apiece, Disney stock has a price-to-earnings (P/E) multiple of just over 17 times, significantly lower than the S&P 500’s average P/E of 24.6 times. Dividend growth investors looking for value may want to consider this opportunity.