Here's Why The Walt Disney Company Deserves its Place on the Dow

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) has been America's most-watched market index for decades, despite -- or perhaps because -- of its narrow focus on a mere 30 stocks. Where other indices might track 500, or 2,000, or even 5,000 different stocks, the Dow's steady focus on 30 business bellwethers has made it both easier to understand and easier to dismiss as a relic of simpler times. But as long as the Dow remains front and center in every day-to-day market analysis, it and its component companies will remain the most important barometers of American markets.

Source: Wikimedia Commons.

That's why it's important to understand not only the Dow, but its components as well. What do they do? What do they represent on the Dow, and why do they matter to the American economy? Where have they come from and where might they head in the future? Today we'll dig into the details of Disney  (NYSE: DIS  ) to find answers to these questions and more, so that we can understand not just what moves the Dow, but why.

Disney at a glance

  • Founded: Oct. 16, 1923.
  • Joined the Dow: May 6, 1991.
  • Current Dow weighting: 3.2% (14th of 30 Dow components).
  • Replaced: USX (removed after splitting into U.S. Steel and Marathon Oil).
  • Sector represented: Media/entertainment (diversified).
  • Rank (by revenue) among all media/entertainment stocks:
    • o 1st (Fortune 500, entertainment)
    • o 1st (among all U.S. theme park operators, 2012 revenue)
    • o 2nd (Box Office Mojo, 2013 film revenue)
    • o 4th (TVNewsCheck, 2012 local TV station revenue)
    • o 1st (The Wall Street Journal, cable TV channel revenue (ESPN)
    • o 9th (Fortune, World's Most Admired Companies)

Disney is rare among modern American entertainment conglomerates in that it has remained close to its founder's vision for producing entertainment while growing far beyond that original focus. Walt Disney had his sights set on empire almost from the day Mickey Mouse debuted in Steamboat Willie, and he made good on those dreams by expanding the company to produce feature films, television programs, and theme parks before his death in 1966.

Disney suffered through a crisis of leadership after the Disney brothers' deaths (Roy Disney passed away five years after Walt) that nearly undid the company. However, Michael Eisner's leadership from the 1980s through the mid-2000s, and Bob Iger's stewardship to the current day, produced a Disney renaissance that has been driven as much by acquisition as by organic growth. Since joining the Dow, Disney has acquired ABC (which owned ESPN), Pixar, Marvel, and Lucasfilm. It cost Disney roughly $34 billion to buy these four companies, and thus far all four have looked like phenomenal investments. ESPN alone is estimated to be worth more than $50 billion. Pixar's post-acquisition releases have grossed more than $5 billion at the worldwide box office and have produced billions more in merchandise sales. The Marvel cinematic universe has already grossed more than $6 billion for Disney around the world (some Marvel characters are produced by other studios) and has likewise generated billions more in merchandise sales. Lucasfilm owns Star Wars, and you probably already know about that franchise.

Disney's reputation as an entertainment powerhouse is unmatched in the world, but much of its revenue comes from sources the average person might not expect. Its largest segment by far last year, comprising nearly half of all revenue, was its television properties, led by ESPN and other cable channels. Disney's theme parks and cruise ships came in a close second, while its film and television production juggernaut, and the merchandising revenue that flowed from those productions, accounted for only 20% of the company's total take.

Disney by the numbers

DIS Chart

DIS data by YCharts.

  • Ten-year share price growth: 253.6%
  • Ten-year dividend growth: 258.3%
  • Total return (with dividends reinvested): 299.1%
  • Average P/E over the past decade: 17.4 
  • Current P/E premium over average P/E: 22%

DIS Revenue (TTM) Chart

DIS Revenue (TTM) data by YCharts.

  • Annualized revenue growth (past five years): 5.7%
  • Annualized EPS growth (past five years): 18.2%
  • Annualized free cash flow growth (past five years): 17.4%
  • Change in profit margins (past five years): 67.3%

Consumers can be notoriously fickle when it comes to their sources of entertainment, but Disney has done a remarkable job of improving both its top and bottom lines while peddling its tried-and-true brands. It certainly helps that entertainment has proven historically resilient in hard times -- in fact, Disney's very first feature film, Snow White, hit theaters as the American economy was plunging hard into the second wave of the Great Depression, and yet it sold a staggering $66.6 million worth of tickets in nominal terms in the United States, which equates to over $1 billion today when adjusted for inflation. To put that in perspective, it's still among the top 10 movies of all time by domestic ticket sales after adjusting for inflation, according to Box Office Mojo.

Disney knows that its brands have a unique allure in a saturated media environment, and it has rolled out a range of strategies to maximize each brand's value. Last year, Disney's theme parks unveiled a billion-dollar initiative called MyMagic+ to improve visiting experiences and encourage guests to spend more without thinking about it. This is just part and parcel of the "Disney experience," which aims for full immersion in every park. Disney's monster contracts with the NFL, Major League Baseball, the NBA, and college football cost it nearly $4 billion in payments each year, but it's clearly worthwhile to lock up these popular leagues, since ESPN and its sister networks pull in more than $6 per cable subscriber and generate over $7 billion in annual revenue. The company's long-term franchise strategy for Marvel (and now Lucasfilm) has proven extraordinarily successful, turning characters with small but loyal fan bases into billion-dollar properties that can generate billions more in toy sales.

Wall Street is very optimistic about Disney's prospects, as it's earned one of the highest forward growth estimates of any Dow component. Analysts now expect the House of Mouse to increase its earnings per share by 16% annually for the next five years, which seems quite reasonable given that it has improved EPS by over 18% per year for the past half-decade.

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