What started with a man, a sketch of a mouse, and a dream has become one of the most influential and well-known entertainment companies in the world. Walt Disney Company (DIS -1.01%) is currently worth over $150 billion. Owning Disney stock has been a very profitable endeavor, with shares returning over 6,700% since going public in 1978.
But recently, investors have been asking tough and important questions about the future of the company. That has coincided with shares dipping 17% over the past year. Of particular concern is the fate of the company's media networks, including ABC, the Disney Channel, and -- perhaps most importantly -- ESPN. It all begs the question: How safe is Disney stock and its dividend?
Image source: Walt Disney.
First, let's tackle the dividend
This is the easier part of our endeavor. The most important thing to keep an eye on for dividend investors is free cash flow (FCF). This represents the amount of money that a company has put in its pocket during a year from running its business, minus any capital expenditures (like building a theme park).
Over the past twelve months, Disney has brought in $8.4 billion in FCF, and used just $2.31 billion to pay its dividend. That low ratio of 27% is very important. It means that Disney's dividend is very safe should the company run into tough times. It also means that there's lots of room for growth -- which is important to note since the stock's current yield is just 1.4%.
Now, on to weightier issues at the House of Mouse
Disney has four business divisions, and it's important to understand each of them. They include:
- Media Networks: Disney Channel, ABC, ESPN, and other stations.
- Parks and resorts: Disneyland, Disneyworld, and other international locations.
- Studio entertainment: Movies that Disney produces, like Star Wars, Captain America: Civil War, Zootopia, Finding Dory, and others.
- Consumer products and interactive media: Licensing for game developers, as well as purchases made at Disneystore.com and Marvelstore.com
To get an idea for how important each segment is, and their growth trajectories, here's a view of revenue and operating income since 2014.
Data source: SEC filings
If we want to break this all down into one simple statement, it would go like this: Disney's parks and movies studios are doing very well, but media networks aren't. ESPN is definitely the largest part of that segment, and the reason for the downfall is two-fold. First, people are cutting the cord on cable, and that hurts Disney. Secondly, ESPN used to fly solo in the 24-hour sports world, but the industry is becoming highly commoditized.
The good news for investors is that ESPN has a plan to combat the cord-cutting: "skinny" streaming options through its stake in streaming provider BAMTech. The idea is that customers can get all of the sports that they want through streaming, and work around the cable providers entirely.
If this works, it could help stop the bleeding in the Media Networks division. If not -- and it will be a while before investors can really get a gauge on whether or not it's working -- the stock may still have a ways to fall.
A silver lining
But there's good news for those who own shares already. First, because the dividend is so safe, the yield will likely go up even if the stock falls -- meaning your automatic dividend reinvestment will net you more shares over the long run.
Second, and perhaps more importantly, Disney still owns some of the most valuable and beloved brands and content in the world. While the drama playing out in the media networks right now is a sign of the shifting times in content distribution, things like Mickey Mouse, Star Wars, and the whole host of Marvel characters have proven themselves timeless.
The bottom line: investors need to be aware of the risk that cord-cutting presents. It could continue to create pain over the short-term. But in the long-run, this is a well-run, dividend-paying company that has a huge moat of valuable brands surrounding it. Over the decades-long run, investors can take solace in that.
