Looking at Disney’s balance sheet, we can see that the company has about $4.3 billion in cash on hand compared to debt of $18.9 billion. Importantly, the company’s entire debt could be covered with its cash and just 1.1 years of earnings before interest and taxes (EBIT). Furthermore, the company generates very reliable free cash flow, which provides excellent dividend coverage. Overall, Disney’s balance sheet looks good.
Source: Simply Safe Dividends
To summarize, Disney scored extremely well for Dividend Safety because of its low payout ratios, strong free cash flow generation, decent performance during the last recession, and relatively clean balance sheet.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Disney’s dividend growth prospects are excellent, prompting its 99 Dividend Growth score. While the company is far from becoming a dividend aristocrat any time soon, Disney has paid uninterrupted dividends since the 1980s and grown its dividend by approximately 18% per year over the last 10 calendar years.
Disney paid its dividend on an annual basis until last year when it moved to a semi-annual payment schedule and raised its dividend by 19%. With low payout ratios, a healthy balance sheet, and above-average earnings growth prospects, we expect Disney to continue rewarding shareholders with double-digit dividend increases for years to come.
Valuation
DIS’s stock trades at roughly 15x forward earnings and has a dividend yield of 1.5%, which is in line with its five year average dividend yield.
While evolving pay TV trends have created some near-term uncertainty regarding Disney’s earnings growth rate, we believe this is a business that can continue achieving mid-single digit sales growth and near double-digit earnings growth over at least the medium-term.
If our expectations are met, the company appears poised to deliver a double-digit annual total return with excellent dividend growth prospects. However, we feel much less certain about Disney’s earnings growth over the next 1-2 years given the negative subscriber trends in Media Networks and the tough comps in Studio Animation.
If it turns out that the market has overestimated profit growth in these businesses and the stock pulls back further, we would really start to get interested.
Conclusion
Walt Disney Co (NYSE:DIS) is a wonderful business with a portfolio of brands unlike any other. While concern about profit growth in Disney’s Media Networks segment has us on the sidelines right now, we would really like to own this blue chip dividend stock in our portfolio. Disney is on our watch list, and we would like to revisit the stock if it trades into the mid-$80s.
Disclosure: None
