In April, Disney CEO Bob Iger broke down the company’s streaming plans, creating fervor in the market. As the company highlighted its plan to enter into the streaming business, bulls came out of the woodwork.
Disney shares broke out above the $120 resistance level that had held them down since the summer of 2015 when the cord cutting phenomena became the number one threat facing traditional media names.
During the fall, the excitement around Disney cooled off a bit and some wondered whether or not the rally was over. As shares fell from their 52-week highs in the mid-$140’s down to the $130 range, investors began to question whether or not we’d see that $120 level tested again, this time to the downside. Oftentimes, prior resistance becomes support after long periods of consolidation, but shares never sunk that low as the Disney+ launch ignited about wave of buying.
And now, almost a month after Disney’s streaming service launched, it’s clear that the market underestimated the power of Disney’s content and fan base.
Disney+ had over 10 million subscribers after the first 24 hours of its existence. Several weeks later, reports surfaced claiming that the Disney+ momentum was far from over, with the service adding 1 million new subscribers every day.
During its 2019 Investor Day Presentation, management said that it expects to have 60 to 90 million Disney+ subs by 2024. At this rate, it appears that Disney will hit those figures sooner, rather than later.
And, on top of the growth in the streaming space, Disney continues to execute in the other areas of its business as well.
Theme parks have shown strong growth throughout 2019, with revenues increasing 6% and operational earnings up 11% during the trailing twelve months.
The company has already broken its own global box office record this year and with Frozen 2 currently starring in theaters and Star Wars: The Rise of Skywalker still on the docket, it’s likely the new record will approach the $10 billion mark.
Frozen 2 just set a Thanksgiving Day weekend record and it likely to be yet another $1 billion film (it will be the 6 $1 billion blockbuster that Disney has released in 2019 alone).
The Mandalorian is one of the most popular shows across all streaming platforms at the moment and the interest this exclusive show is creating will likely be a boon for the upcoming Star Wars film that is set to launch in theaters on December 20.
The “baby Yoda” character from The Mandalorian is already a pop culture phenomenon and Disney is sure to reap the benefits of this craze on the merchandise front during the holidays.
All of this exciting growth has inspired the market to re-rate Disney stock. Disney shares are up nearly 35% year-to-date, beating the broader market by a wide margin. This rally wasn’t built on the back on earnings growth, but instead, multiple expansion.
Disney is no longer trading with the sub-market multiples that many of the traditional media names have been known for. Instead, has placed a large premium on Disney shares, amounting to nearly 26 times trailing twelve month earnings. This is the highest multiple that Disney shares have traded with since the early 2000’s.
And who could blame investors? This is a proven blue chip company with renewed growth prospects that is firing on all cylinders. Well, as it turns out, all but one.
While many investors were focused on Frozen 2’s $750 million worldwide box office figures announced early in the week, dividend growth investors were focused on another, less joyous aspect of this company: the dividend.
When Disney declared its January dividend on Wednesday and it turns out that Elsa isn’t the only thing that was frozen. As it turns out, the 2020 dividend appears to be as well.
Now, I want to be clear, there is a big difference between a frozen dividend and a cut dividend. Disney did not lower its dividend payouts. However, it did not increase it on schedule, either.
The December declaration is usually when Disney increases its annual dividend. The company has increased its annual payment for nine years in a row now. But, instead of increasing the payment this year, the company maintained its $0.88/share semi-annual payment, meaning that it’s likely that this streak will end.
Disney could increase its dividend during the July declaration in 2020 and maintain its current consecutive annual dividend increase streak, but at this point in time, it appears that management is going to focus its cash flows on paying down debt from the Fox deal and the continued heavy investments required for the company’s streaming services to flourish.
Obviously seeing a streak like this end was disappointing to some (myself included). Younger dividend growth investors rely on dividend increases, alongside dividend re-investment, to compound their wealth. And retirees rely on dividend increases to protect the purchasing power of their passive income stream from being eroded by inflation.
All investors should always be aware that dividends can disappear in a heartbeat. Although there are a handful of dividend aristocrats with annual increase streaks much longer than my own life span thus far, a company is not obligated to pay, more or less, raise, its upcoming, undeclared dividends.
However, when we’re talking about a blue chip company like Disney known for being generous to shareholders, investors expect to see cash flows returned to their pockets, directly.
In the recent past, Disney’s has done exactly this. During the past five years alone, the company’s annual dividend has more than doubled. The problem is, this is the type of growth that certain income oriented investors have come to expect.
It’s worth noting that Disney is not a dividend aristocrat. Unlike other companies in the market, Disney has not proven that it can increase its dividend throughout a wide variety of macro environments. This company’s earnings are fairly economically sensitive and therefore, historically, management has been conservative when it comes to growing the dividend.
Disney last froze its dividend in 2009-2010 in the aftermath of the Great Recession due to falling earnings per share and a lack of bottom-line clarity moving forward.
Obviously the macro environment today is much healthier than it was a decade ago. Today, Disney isn’t being frugal with its cash flows because of rampant fears of recession, but instead, negative bottom-line growth pressure being put on to the stock due to the capex associated with the fierce competition in the streaming wars.
Although I expected to see Disney raise its annual dividend from the $1.76 level to the $1.90 level or so and the fact that this did not happen is upsetting, I haven’t lost faith in this company as a long-term investment.
I think the Fox acquisition was a great move that helped set up Disney for success with its multi-tiered streaming plans involving Disney+, Hulu, and ESPN+. The company’s debt load is now triple what is was five years ago, but to me, this debt is a necessary evil as Disney attempts to re-imagine itself in the digital era.
Frankly put, I don’t mind seeing management focused on repairing the balances sheet and the billions that it will have to spend in the coming years on original content to keep up with Netflix (NFLX) - Get Netflix Inc. Report and others in the streaming space.
This company might not be a dividend aristocrat any time soon, but I think it still has the potential to generate significant long-term wealth for shareholders.