The company reported more ESPN subscriber losses during its fourth quarter of 2015, bringing its total lost subscribers to roughly seven million over the last two years combined. As a result, Disney’s Media Networks segment saw its operating income fall by 6%. Higher programming costs also dinged profit as Disney has to pay for rights to air sporting events.
We believe Disney will successfully evolve its content distribution however it needs to over the long run, but we are less certain what will happen with its media profits over the near-term. They have driven much of the company’s growth in recent years, and investors could be in for a surprise if trends flatten out or even decline for a period of time. If this were to play out, it would seem to be a buying opportunity for long-term dividend growth investors – sports will remain an extremely popular category, and Disney’s content is no less valuable than it was before.
In addition to uncertainty in Media Networks, the company can also experience volatility in its Studio Entertainment business, which primarily produces movies. Production costs are very expensive and are incurred before Disney recognizes revenue – in other words, a lot of money is spent before knowing if it will result in a big hit with consumers or fizzle out for a sizeable loss. This segment has delivered record profits for two straight years, but there is always risk of a dud if Disney gets it wrong. Once again, we would view this as a buying opportunity.
Dividend Analysis: Disney
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. DIS’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Walt Disney Co (NYSE:DIS) has one of the safest dividends that investors can find. The company’s earnings and free cash flow payout ratios have averaged less than 20% over the last decade and sit in the mid-20% range over the last 12 months. This is a very low and healthy payout ratio for any business, especially one like Disney’s that is growing earnings at a double-digit clip.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
In addition to low payout ratios, Disney’s business held up fairly well during the last recession. During the financial crisis, Disney’s sales fell by 4% and its earnings per share declined by 23%. The company’s powerful brands helped it weather the recession better than most consumer-driven stocks, and DIS’s stock was able to outperform the S&P 500 by about 8% in 2008.
Source: Simply Safe Dividends
Disney’s strong brands, timeless content, pricing power, and massive distribution have resulted in excellent free cash flow generation. As seen below, Disney’s free cash flow per share has more than tripled since fiscal year 2005, fueling generous dividend growth along the way.
Source: Simply Safe Dividends
Not surprisingly, Disney has earned a nice return on invested capital each of the last 10 years. Businesses that earn double-digit returns often have an economic moat, and Disney is no exception.
Source: Simply Safe Dividends
