Is the Force Really With Bob Iger?

By Steven Mallas - November 1, 2012 | Tickers: TWX, DIS | 0 Comments

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Disney (NYSE: DIS) buys Lucasfilm for $4 billion in cash and stock. The Mouse owns Star Wars. CEO Robert A. Iger is a genius. There's no argument on this, right?

Wrong.

Bob Iger is, quite honestly, getting ridiculous with his acquisition strategy. First, there was Pixar. Then there was Marvel. Now, Star Wars. What will Bob buy next? DreamWorks Animation? Lions Gate Entertainment (Disney could make a new Saw movie in the years in which it doesn't release a new Star Wars picture)? Is there anything left to buy? Maybe he should buy Hasbro just to get at the Transformers movies (please don't anyone even jokingly suggest that to him!).

Iger has failed to impress me for a long time now. And I've been a long-time shareholder of his company. So why haven't I sold my position? Well, there are two answers to this. First: I actually have reduced my exposure to Disney a little in the last year or so. Second: I don't believe Iger can destroy Disney since the company has one of the best brand equities in its marketplace.

What I am worried about as a long-term shareholder is this: will Disney be able to properly manage all its acquisitions, such that it can maximize its total return to its stock owners? Believe it or not, I'm not 100% convinced Disney will live up to its potential. It will do very, very well; but hey, I'm taking the risk here, so you can't blame me for being a little greedy and a little cautious--after all, one day there might be an acquisition that everyone falls in love with that eventually falls flat on its face.

If Iger is so smart, why can't he figure a way to grow Disney more organically? Here's what a true media Renaissance man would do to solve the problem of increasing returns on filmed entertainment (and I've beaten this horse to death on other platforms, let me warn you): figure out a way to reduce compensation to star performers, including the elimination of gross participation deals, and create a more efficient, less-expensive way of marketing movies that still is effective enough to bring in huge first-weekend box-office numbers.

But no, not Iger (nor for that matter any smart-guy-studio-head in Hollywood). Iger knows how to do one thing, one thing only, and I have to give him the credit he's due because, truthfully, he does it better than anyone else. He buys things. Expensive things. Pixar; Marvel; Lucasfilm. Great.

But he also buys other things, too, assets that might not have cost as much but that nevertheless still have me scratching my head. Club Penguin; Playdom; various video-game studios, some of which are no longer active; the repurchase of the Disney retail operation. Personally, I don't have a lot of confidence in Club Penguin, as I feel kids will eventually move on to other web distractions. Playdom is a bet on the growth of social media games, but as with Club Penguin, the Internet moves faster than the Millenium Falcon through the Kessel Run, and it could conceivably make that purchase not so attractive in the near future. When you think about the big bet Disney made on console gaming, and you then consider the migration of gamers from consoles to online fare, the conclusion you've got to draw is that Iger seems to be chasing growth, when he perhaps should have remained on the sidelines.

If Disney wants to be the steward of characters from Pixar, Marvel, and now Lucasfilm, it's going to have to need to take a break from its buying spree and use a fair amount of capital to invest in its new properties. Screenwriters and directors like Joss Whedon don't come cheap. What Disney is essentially saying with its Pixar-Marvel-Lucasfilm triumvirate is that the cost of investing in new, original content is so fraught with risk that the only option to derive true economic value from the multiplex is to enter risk-mitigation contracts via the act of paying goodwill premiums on already established license-ready vehicles. Yet, this is the company that came up with The Lion King, Pirates of the Caribbean, and Hannah Montana. What made Iger suddenly lose his confidence in the Mouse's creative abilities?

Of course, there's something in this whole buying-spree-thesis that pundits don't talk about too often: the dividend. Iger needs to decide if the destiny of Disney's shares is to deliver capital appreciation or a generous yield. Obviously, one wants both, but on paper at least, a company has to decide what its focus will be, especially one that has been around as long as the House of Mouse has. Every time Iger buys something, he has essentially stated that the company's capital is better used in the name of portfolio-building than in the name of shareholder friendliness. In the last quarterly earnings report, which you can find here, you'll see that Disney brought in, over the last nine months, roughly $6 billion from operations, spent $3 billion on capital expenditures, and paid out $1 billion in dividend payments.

Disney could easily double its dividend from its current level, or it could even go further if it wanted to. Paying out another $4 billion in cash and stock, however, doesn't encourage me as far as the next increase in the annual dividend goes.

I would love to see Disney's past acquisitions monetized into a much higher dividend yield, a series of special dividends, or, at the very least, a return to a quarterly dividend schedule. To do this, I believe the company will have to sit back and simply work on the assets it currently has, or perhaps even shed some. If it were up to me, I would definitely unwind the trade Iger made with his video-game and online strategies and reallocate the capital to shareholder-friendly initiatives; as can be seen in the last quarterly announcement, the interactive operating segment posted losses for both the three-month and nine-month periods.

Dividends are important because films oftentimes don't tend to move the needle on a stock's share price, at least if we're talking about big conglomerates. If a competitor like Time Warner (NYSE: TWX) releases a new Harry Potter movie and it does incredibly well, the stock might still sell off if other parts of the business aren't faring as well, or if the economy as a whole is tanking. Dividends are real, and Time Warner's shares currently yield 2.4%; Disney's stock yields 1.2% by comparison. To be fair, Disney has grown its dividend substantially in recent times, but I know the dividend could be even more attractive if the board wanted it to be.

I'll hope for the best with Lucasfilm, but I would encourage the next CEO (Iger is due to step down from his current position in 2015, although he will remain executive chairman for a little over a year after that) to avoid Iger's growth-through-acquisition strategy and to instead work with what has been given him or her so that profits can be grown organically. Hopefully this will fuel a renewed, laser-sharp focus on increasing dividend payments being added to the corporate genome. Iger makes a lot of money per year -- too much, in my opinion, for a man who simply looks to buy instead of build.

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