Walt Disney Stock: A Dividend Analysis

The Walt Disney Company (NYSE: DIS) is one of the largest diversified international companies specializing in entertainment, media, parks, resorts and various consumer products. Disney owns some of the most recognized TV channels in the United States, including Disney, ABC and ESPN. The company also operates highly popular amusement parks around the world, and it produces movies, cartoons and shows for kids and adults. With its highly recognized brand and a very profitable sports channel, Walt Disney was able to grow its net income and operating cash flows into double digits from 2010 to 2015. As a result of its successful financial performance, the company has consistently paid, and increased, dividends year after year, making Walt Disney an attractive option for income-seeking investors.

The company has consistently paid dividends from 1995 to 2015, and it has one of the best track records of gradually increasing its dividends year after year. Disney raised its dividends per share from just over 23 cents in 2004 to $1.15 in 2014, which represents an average annual growth rate of 17%. The company paid dividends once a year before 2015; however, in June 2015, Disney declared a cash dividend of 66 cents per share for the first six months of the fiscal year 2015, and announced the company will pay dividends on a semi-annual basis. The 66-cent dividend per share represents a 15% increase on an annualized basis when compared to 2014.

While Disney does not disclose how it determines its dividends, the payouts are likely contingent on the company's performance and especially its ability to generate sufficient operating cash flows to cover its investment and financing requirements. As of June 2015, the company has a short- and long-term debt outstanding of $15.3 billion that is mostly due beyond 2020, giving it ample room for financial maneuvering with its cash on hand balance of $4.5 billion.

From 2004 to 2014, Disney's payout ratio ranged from 14.2% in 2007 to 22.8% in 2013, and its average payout ratio was 18.4%. In 2015, due to increasing operating cash flows and strong overall financial performance, Disney's payout ratio increased to 37.6% for the trailing 12-month period ending on June 27, 2015. Its current payout ratio of 37.6% is slightly above the media sector's average of 30.2%.

Disney's dividend yield is dependent on the dividend policy established by the company's board of directors and how the stock price changes. From 2004 to 2014, the Disney's dividend yield ranged from 0.37% in January 2005 to 1.04% in February 2009. Its average dividend yield from 2004 to 2014 was approximately 0.5%. In July 2015, the company's dividend yield jumped to 0.75% as a result of the 15% increase in the annual dividends per share. Also, since quarterly results as of June 27, 2015, did not meet analysts' estimates and there is growing concern over the TV industry, the company's stock price decreased by about 20%. As a result of its stock price decline, Disney's dividend yield went up further to 0.9%. At the end of September 2015, Disney's dividend yield stands at 1.3%.

Disney's dividend yield was 1.2% on average from 2010 to 2015, which is somewhat lower than the average of 1.9% for its peers within the media industry. As of September 2015, Disney's dividend yield of 1.3% is much lower than the media industry's average of 3.1%. The industry's average is skewed, however, as there are a few movies and entertainment companies that do not directly compete with Disney but have higher dividends yields. Regal Entertainment Group and AMC Entertainment Holdings, Inc. have dividend yields of 4.9% and 3.3%, respectively.

Disney's closest competitors in the broadcasting and media business have dividend yields that range between 1 and 2%. Time Warner, Inc., which competes with Disney in the TV broadcasting space, has a dividend yield of 2.1%. Twenty-First Century Fox, Inc. a global programming entertainment company, has a dividend yield of 1.1%. Comcast Corporation, a U.S. media conglomerate, has a dividend yield of 1.8%. While certain Disney competitors have higher dividend yields, none of them enjoy as high a degree of media products diversification as Disney does with its franchising, movies and TV channel offerings.

Disney's low dividend yield can be attributed primarily to its stock appreciation and the company's emphasis on stock buybacks rather than its dividends. From 2010 to 2015, the company bought back its own common shares worth $21.3 billion and is continuing its buyback program as of September 2015. The company's spending on the share buyback program by far exceeds cash dividends. Some companies, such as Disney, prefer generating shareholders' returns through share buybacks rather than paying cash dividends since buybacks typically defer taxes for investors.

Disney's television and movies business lines coupled with its extensive franchising operations enabled the company to increase its operating cash flows from $6.6 billion in 2010 to $10.7 billion for the trailing 12-month period ending on June 27, 2015. Disney prudently manages its capital by splitting its operating cash flows between its capital investments and financing needs so that at the end of the day, the company is left with a sufficient liquidity buffer. This is evidenced by Disney's cash balance, which grew from $2.7 billion in 2010 to $4.5 billion in 2015.

Despite recent challenges in its TV business, Disney remains in a financially solid position that enables the company to continue its dividend and share buyback program. The company's debt-to-equity (D/E) ratio of 33% remains far smaller than its peers in the media sector, which has an average D/E ratio of 68%.

In September 2015, Disney took advantage of rock-bottom interest rates by issuing bonds worth $2 billion that will mature within three, five and 10 years. Because of the company's superior financial position, its bonds have an investment-grade rating and are issued at very low spreads. Disney has an interest rate coverage ratio of 49.7, and interest rate payments do not pose any risk to its payout policies. Disney's dividend coverage ratio stands at 549%, as the company spends most its funds on share buybacks instead of cash dividends.

Disney enjoys a highly favorable position within media networks with its premier channels ESPN and ESPN2, which have exclusive deals with the National Football League. The company's sports channels charge some of the highest fees among similar channels and generate some of the highest revenue streams from advertising. The Disney Channel is also one of the most trusted channels among parents who subscribe to media content for their kids. Yet, Disney's broadcasting business is continuing to see some softness as consumers drop cable subscriptions and switch to Internet TV offerings. This development is likely to generate some headwinds for Disney and may slow down the company's growth in operating cash flows.

Disney is also generating an increasing amount of revenue from its characters by issuing franchising rights. As the company diversified its characters and franchises by purchasing cartoon and movie studios, such as Pixar, Lucasfilm Ltd., LLC. and Marvel, Disney has been able to expand its portfolio of characters and appeal to a much broader audience. As the company continues creating movie hits and generating growing franchising sales, these revenue streams should offset any declines in Disney's broadcasting business and provide a sound foundation for a continued dividend policy.