Disney (DIS) Dividend: Even Blue-Chip Companies Are Not Immune

The COVID-19 pandemic has shown that even blue-chip companies like Disney are not immune to dividend cuts and suspensions. Disney is on the Dow Jones Industrial Average or DJIA. The Walt Disney Company (DIS) officially suspended its semi-annual dividend on May 5, 2020. The dividend was typically $0.88 per share payable in the second and fourth quarters. This dividend cut will also have major impact on small investors. But the yield was not that high at only about 1.7% before the cut.

But still, Disney’s dividend suspension is not really surprising as COVID-19 has had a major negative impact on the company’s operations. Disney’s theme parks are closed, and advertising revenue has probably dropped like a brick. Other theme park companies including Six Flags (SIX) and Cedar Fair (FAIR) were suspending their dividends. It just goes to show that even blue-chip companies like Disney are not immune from dividend cuts.

Disney continues to struggle even two years after the start of the COVID-19 pandemic. The company was one of the worst performing Dow Jones stocks in 2022 because of after effects of the COVID-19 pandemic, high labor costs, inflation, missteps in Florida, and a CEO change.

Overview of Disney

The Walt Disney Company was founded by Walt Disney in 1923 in California. The company operates in multiple business segments: Media Networks; Parks, Experiences and Products; Studio Entertainment; and Direct-to-Consumer & International. Major Brands include Disney, ESPN, FX, National Geographic, ABC, Disney World, Disneyland, Twentieth Century Fox, Marvel, Lucasfilm, Pixar, Fox Searchlight Pictures, Blue Sky, Star, and others. Most brands operate across multiple segments. The company also owns iconic cartoon characters and other fictional characters.

Total revenue was $82,722 million in the fiscal year 2022 and the last twelve months.

Disney is not Immune – Dividend Suspension

The firm had paid a continuous dividend for 40 years. The company had also paid a growing dividend for 10 years before the suspension. That made the company a Dividend Contender. A Dividend Contender is one that has raised the dividend annually for 10 to 24 years. At end of April 2020, this number has dropped over the past month from 301 to 288 because of the pandemic.

Disney is one of the unique companies in the U.S. that pays a regular cash dividend every six months. This is similar to many European companies. Most U.S. companies pay a regular cash dividend quarterly. In Disney’s case the dividend covers the trailing six months. You can see the recent trailing history in the table below.

Revenue actually increased in Q1 2020 since Disney benefitted from the recent acquisitions of Twenty-First Century Fox and Hulu, and the launch of Disney+. Revenue increased to $18.01 billion and beat estimates by over $500 million.  However, earnings were much lower than expected and missed consensus estimates by ($0.29) per share. This was due to much higher costs than the previous year and a greater number of shares.

The pandemic occurred late in the first quarter and its impact on Disney is probably not reflected in the most recent earnings report. So, Disney is probably preparing for a weak Q2 2020 and Q3 2020 with the dividend suspension. Based on the chart above, the dividend suspension will save the company approximately $1.6 billion in cash. The closure of theme parks, no cruises, delayed movie releases, limited movie and television show production, and drop in advertising revenue will likely hit Disney hard in Q2 2020 and possibly Q3 2020. So, the suspension of the dividend was not surprising in my opinion.

Specifically, the company stated in the 10-Q:

The Board of Directors elected not to declare a dividend payable in July 2020 with respect to the first half of fiscal year 2020.

The company also stated:

The Company (or our Board of Directors) has also elected to not declare a dividend payable in July 2020 with respect to the first half of fiscal year 2020; suspended certain capital projects; reduced certain discretionary expenditures (such as spending on marketing); temporarily reduced management compensation; temporarily eliminated Board of Director retainers and committee fees; and furloughed over 120,000 of our employees (who will continue to receive Company provided medical benefits). We may take additional mitigation actions in the future such as raising additional financing; not declaring future dividends; reducing, or not making, certain payments, such as some contributions to our pension and postretirement medical plans; further suspending capital spending, reducing film and television content investments; or implementing additional furloughs or reductions in force. Some of these measures may have an adverse impact on our businesses.

On Disney’s earnings call transcript, the CFO stated:

From a cash flow standpoint, the Board has made the decision to forego payment of a semi-annual dividend for the first half of the fiscal year, which would have been payable in July. This preserves about $1.6 billion in cash assuming we had held the dividend constant at $0.88 per share.

Disney is Preserving Liquidity for the Future

Ultimately, for Disney, maintaining the balance sheet and reducing cash flow obligations is about preservation. The balance sheet has a large cash position now of $14,339 million. The company issued additional short-term and long-term debt to increase its cash postion.

At some point, Disney will reopen its theme parks, release movies, restart movie and TV show production, sporting events will restart, and advertising will increase. Disney will need liquidity when this happens. Along these lines, Shanghai Disney reopened on May 11^th. Reportedly, tickets sold out after a three-month shutdown. The caveat is that the park is open with a cap on attendance. It will likely be sometime before the park can return to full attendance because of the challenges of COVID-19 in China.

Disney’s Dividend Safety

In normal times Disney’s dividend is probably very safe on an annual basis. In fiscal 2019, the dividend was well covered by earnings and cash flow. But fiscal 2020 will not be a ‘normal’ year for Disney and it is possible that fiscal 2021 will be a semi-normal year for Disney. Let’s make the assumption that fiscal 2020 will have about half the earnings of fiscal 2019, or roughly $3.15 per share. We will also make the assumption that Disney pays half the normal dividend at $0.88. In this case, the dividend is well covered by earnings with a payout ratio of about 28%. This is below my criterion of 65%. This is in line with the payout ratio over the past several years when it ranged between 20% and 36.5%.

Let’s make similar assumptions for free cash flow. Suppose Disney pays out half a normal dividend in fiscal 2020 then the dividend will require $1.6 billion in cash. If operating cash flow is about half of fiscal 2019 (not including the losses for sale of investments) then we get a operating cash flow of $5.5 billion. If we assume lower capital expenditures of $3 billion then free cash flow is $2.5 billion. In this case, the dividend-to-FCF ratio is 64%. This is OK, and still below my threshold of 70%.

Note that the above discussion on dividend safety is largely hypothetical. I do not have crystal ball. But at the same time, it is an exercise to see if the prior dividend will be safe if reinstated at the same level as before COVID-19. I view that as unlikely in 2020 and remotely possible in 2021.

Final Thoughts on Disney’s Dividend

COVID-19 has brought a lot of uncertainty to many companies. Even blue-chip companies like Disney are not immune from its effects. The timing of resumption of ‘normal’ operations and ‘normal’ demand is largely out of Disney’s control. Disney’s operations are still not returned to normal by early-2023. In China, the COVID-19 pandemic is still affecting travel and government restrictions were only eased recently.

However, Disney benefitted from the restrictions and lockdowns in its streaming operations. Disney+, Hulu, and Hotstar reportedly gained subscribers at a rapid clip cushioning the blow of COVID-19 somewhat on Disney. With that said, it will be awhile until Disney returns to ‘normal’ operations and a ‘normal’ dividend.

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