When it comes to core operating cash flow growth, the only company to perform worse was Comcast Corporation (NASDAQ:CMCSA), which reported growth of 6.96%. Disney reported cash flow growth of 10.86%, whereas CBS’ cash flow was up 12.87%, and Time Warner’s was up 17.71%. Since Disney reported better overall revenue growth, you would expect their cash flow to increase the most, but it did not.
The third problem: The company has the highest core free cash flow payout ratio of their peers. Core free cash flow is simply net income, plus depreciation, minus capital expenditures. Using this measure, Disney paid 44.06% of their free cash flow in dividends.
By comparison, Time Warner Inc (NYSE:TWX) paid 32.04%, Comcast paid 19.06%, and CBS Corporation (NYSE:CBS) paid just 14.86%. While Disney’s payout ratio isn’t troublesome, Disney is starting from a higher number, so without superior cash flow growth, future dividend increases may be lower than investors expect.
Lastly, Disney’s stock isn’t the relative bargain that it used to be. In prior quarters, I would compute a PEG+Y ratio for Disney and their peers, and Disney was in the middle of the pack. The PEG+Y is the company’s yield, plus its earnings growth, divided by its expected P/E ratio. The higher the number, the better, since this means the company has a higher expected total return, and a lower relative P/E ratio.
Using this measure, Disney comes in dead last, with a PEG+Y of 0.72. This isn’t a surprise, because at 19 times forward earnings, Disney is relatively more expensive, and their 12.5% earnings growth rate, ranks second lowest. By comparison, Comcast Corporation (NASDAQ:CMCSA) scores the best, with a PEG+Y of 1.14, while Time Warner Inc (NYSE:TWX) and CBS Corporation (NYSE:CBS) essentially tie for second at 0.89 and 0.87 respectively.
Stay tuned, Mouseketeers
Don’t get me wrong — I like The Walt Disney Company (NYSE:DIS)’s chances over the long-run. However, I think the stock has gotten a little ahead of its fundamentals. The company’s payout ratio is higher than its peers. It has the second slowest expected growth rate, the second lowest yield, and the highest P/E ratio. When you combine these factors with subpar cash flow growth, you get rain clouds on the horizon. Existing investors should hold tight, but I wouldn’t buy in at these prices.
The article 4 Reasons This Stock Looks Overvalued originally appeared on Fool.com and is written by Chad Henage.
Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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