Disney Will Increase Dividend In 2012

By Christopher French - February 17, 2012 | Tickers: NWS, TWX, DIS | 0 Comments

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Walt Disney Company (NYSE: DIS) did not cut its dividends during the financial crisis. It actually increased its dividend on an almost annual basis from 2005 on. Since the crash, the company has been doing quite well across the board. Revenue gradually increased from 2009 and profits have proportionately improved even more significantly. Management’s focus on improving margins shows. The question is, will Disney be able to sustain its dividend and if so, will it be able to show an even more drastic increase this year? In this article, I will discuss how Disney has managed to improve its earnings in such a way and whether it will be able to further compensate common shareholders in the form of an increased cash dividend this year.

Competitive Position

The S&P characterizes Disney’s business profile as “strong.” It has low leverage with a debt to EBITDA of 1.8. This, being below the S&P’s threshold of 2.0, will “help insulate the company from cyclical and structural risks.”

Disney reported its most recent revenue slightly below analyst expectations. However, the recent revenue shortfall was mainly due to the more volatile revenue sources such as the Studio, Consumer Products and Interactive divisions. The core drivers, which can be considered the ESPN and Park margins, are still “intact.”

Because Disney is so versatile and has several successful franchises, it is well positioned to fend off threats arising from competition or economic pressures. Competitors include Time Warner (NYSE: TWX) and News Corporation (NASDAQ: NWS). Though Time Warner recently reported strong fourth quarter results with a 4% increase of revenues to $5 billion, I think the company is not positioned as well for dividend growth. I believe Disney's management has much better decision making stills compared to News Corporation, which sold Myspace for a $545 million loss in 2011.

Dividend History

From 2002 through 2004, Disney paid out a $0.21 dividend and then increased it to $0.24, $0.27 and $0.31 in 2005, 2006 and 2007, respectively. In 2008 through 2010, it paid a $0.35 dividend and then further increased it to $0.40 in 2011. Currently, Disney is paying an annualized dividend of $0.60. This amounts to a 1.5% yield with a payout ratio of 16%.

Profitability

Disney is impressively profitable. From 2009 until most recently, Disney has been growing all margins. In 2009, 2010 and 2011, Disney had a net margin of 9.15%, 10.41% and 11.76%, respectively. The current trailing-twelve-month (TTM) profit margin has risen even further to 12.13%. Additionally, from 2009 until now, Disney’s return on assets increased by about 30% to 6.86% while the return on equity concurrently rose by just over 32% to 13.24%.

Furthermore, Disney’s earnings per share (EPS) increased by $0.88 from 2009 until now. During the same period, dividends increased by $0.25 per share. Despite a 71% increase in dividends per share over the last three years, net income synchronously rose at a lesser rate but by about 3.5 times the dollar amount. This suggests that Disney is left with sufficient capital to cover the dividend expense.

On a bleaker note, from 2009 through 2011, receivables increased by about 17% and inventories on hand rose by over 25%. In fact, the inventory turnover has steadily decreased during this period, resulting in an increasing days of inventory on hand (DOH) ratio, suggesting deteriorating inventory management effectiveness. Although not a currently serious concern, this situation should be monitored in the coming periods.

Cash Flow

From 2009 into 2010, Disney recognized a 29.9% year-over-year increase in cash from operations and a 6.32% year-over-year increase into 2011. Due to a large capital expenditure, the free cash flow decreased from 2010 into 2011 but as of the now, the free cash flow is 3.6% in excess of its 2010 highs. Furthermore, although Disney increased its overall cash dividend payment by 15.7% and the cash it used to repurchase common stock by 87% from 2010 into 2011, it recognized a $463 million increase to the cash balance in 2011 compared to a $695 million decrease to cash in 2010. However, part of the cause of this discrepancy is that Disney issued far more debt than what it paid off in 2011. In fact, from the end of fiscal 2011 until now, cash provided by debt has risen by about 57%.  

Projection

So, all this being said, will Disney raise its dividend in 2012? I believe that it will. If margins continue to grow and Disney produces more cash from operations rather than relying on debt financing, Disney will have no problem increasing shareholder compensation and sustaining dividend growth. Also, Time Warner (TWX) pays a 2.5% dividend. This is 1% higher than Disney’s yield. If Disney wants to attract more investors, it needs compete in terms of payouts as well. I believe that Disney will increase its dividend to as high as $0.80 this year. It is transitioning to a later stage in its business life cycle. It won’t need to reinvest as much earnings. The remainder will be used in share repurchases and dividends.

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