Companies that generate stable cash flows, have strong balance sheets, are industry leaders, and have been around for decades tend to be the kind of businesses that investors can count on to survive an economic downturn. There is no doubt that walt disney (dis 3.98%) is the leader in the entertainment industry. After all, it is one of only two communications stocks (along with verizon communications (vz 0.36%) in the dow jones industrial average (djia).
But unlike Verizon, which has the highest dividend yield of all DJIA components at 5%, Disney is only one of three DJIA components that does not pay a dividend. (In case you were wondering, the other two are boeing and salesforce). Here’s why Disney doesn’t need to pay a dividend, but could restore it in a few years.
Reading: Will disney pay dividends in 2022
disney dividend history
Despite its decades-long reputation as a blue-chip value stock, Disney never had a very good dividend record. he would go years without raising his payout and often sported a below-market average dividend yield. By 2019, Disney was only paying semi-annual dividends. Then, in 2020, it cut its dividend in response to the Covid-19 pandemic, which hit its results hard and resulted in its first annual loss in decades.
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In fiscal 2019, the last full year, Disney paid dividends, the dividend payment cost the company $2.9 billion. While the payment provided a decent stream of passive income to shareholders, Disney’s long-term growth plans suggest the money is better put into the business.
disney intermediate goals
The launch of disney+ has cost the company a fortune, with $32 billion in content projected for fiscal 2022 across the linear (cable), direct-to-consumer (dtc) and entertainment segments alone. disney studio DTC’s operating loss for the first quarter of its fiscal year 2022 was $593 million. But it got even worse in the second quarter when dtc reported an operating loss of $887 million, for a total of $1.48 billion in the first half of fiscal 2022.
Coincidentally, DTC’s operating loss is roughly what the company would have paid if it had kept its semi-annual dividend. Therefore, by not paying a dividend, Disney can essentially afford to take losses on its DTC segment.
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losses should be temporary, as company forecasts disney+ to be profitable by fiscal 2024. game plan is to build disney+ with strong original content, move blockbusters to disney+ after they leave theaters , build the subscriber base, reach 230 million to 260 million total subscribers in fiscal year 2024, and then cut spending to make disney+ profitable.
Disney’s long-term goals
if all goes according to plan, disney should be roaring in fiscal 2025. by then, inflation should have cooled, the federal reserve will probably be done raising interest rates, and might even lower rates again, and the economy could return to expansion mode. Therefore, investors could expect fiscal 2024 or 2025 to see record revenues and earnings for Disney.
But even if Disney faces a few more setbacks, the decades-long growth story looks stronger than ever. The Disney Parks have shown their resilience and recovered faster than expected from the pandemic. The variety of movies and shows being produced, and the reception from fans, indicates that Disney’s content creation engine is working.
disney is in the business of creating memories and entertaining people of all ages, both on screen and in person. disney+ plays a critical role in the disney media suite. With the stock down more than 45% from its all-time high, and with Disney’s best years possibly still ahead, Disney looks like an excellent long-term buy now.
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