4 Reasons to Invest in Walt Disney

Walt Disney belongs in your portfolio over the course of your working career.

Jun 19, 2014 at 6:32PM


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"Walt Disney (NYSE:DIS) is the happiest place on Earth." 

You have probably heard or seen this phrase in Disney's advertisements or when you visited its theme parks. Walt Disney's vast universe of characters resonates with everyone that comes in contact with them. However, investing legend Peter Lynch once said, "Investing without research is like playing stud poker and never looking at the cards." 

With that said, let's take a look at the strengths and fundamentals of this entertainment giant to see if it's growing its revenue, net income, and free cash flow--the life blood of any business and the catalyst for superior capital gains and dividend increases. It's also important to check to see if the company is retaining some of that cash for reinvestment back into the business.

Walt Disney enjoys a great deal of brand strength. The company ranked No. 14 on Interbrand's 2013 Best Global Brands and No. 23  on Brand Z's 2014 list of 100 Most Valuable Global Brands.  Moreover, the company owns or partially owns a multitude of other powerful brands like Pixar, Marvel , ESPN, A&E, and Lucasfilm.

Recent successes include Pixar's iconic blockbusters such as Monster University which grossed nearly $269 million over its lifetime according to Box Office Mojo. Marvel, another Walt Disney subsidiary, produces blockbuster movies such as Iron Man 3 which clocked in a lifetime gross to date of $409 million.  Moving into another entertainment arena, sports, ESPN which is 80% owned by the company,  also does well contributing to the 6% gain in year to date cable network revenue.  Walt Disney also owns 50% of A&E  which broadcasts popular shows like Duck Dynasty .

Walt Disney's Lucasfilm owns iconic brands such as Star Wars and Indiana Jones.  High expectations haunt Lucasfilm.  It plans on releasing Star Wars Episode VII in 2015  which represents one of the most highly anticipated films of the decade.

Revenue diversity
Walt Disney operates in five major segments: media networks, parks and resorts, studio entertainment, consumer products, and interactive. Walt Disney can take big blockbuster names and parlay them into theme parks, television shows, cruise line themes, toys, and video games giving it multiple opportunities to market each and every one of its brands. 

Solid fundamentals
Of course, all of this brand strength and multiple sources of income resulted in strong fundamentals for the company. Over the past 10 years Walt Disney grew its revenue, net income, and free cash flow 47%, 162%, and 107% respectively.  

More recently, Walt Disney grew its year to date revenue, net income, and free cash flow 9%, 30%, and 8%, respectively. Huge across the board gains contributed to these numbers most notably the studio entertainment segment which saw significant gains due to the movies Frozen and Thor: The Dark World

Walt Disney sits on an ok balance sheet with cash and long-term debt to equity clocking in at 9% and 23%, respectively.  The cash ratio resides a little in the low range. However, the low long-term debt to equity balance represents a good thing because interest on long-term debt can choke out profitability and cash flow over the long-term. Investors should look for companies with long-term debt to equity balances of 50% or less.

Walt Disney also pays a small dividend. It's best to gauge dividend sustainability by looking to see how much of company's free cash flow gets paid out in dividends in a full year. Like long-term debt to equity ratios, a good rule of safety resides at 50% or less.

In 2013, Walt Disney paid out a frugal 19% of its free cash flow in dividends.  Currently, the company pays its shareholders $0.86 per share per year translating into a yield of 1%.

What should you do?
Current investors should hold tight to their shares of this company and may want to buy more. Disney's brand strength and reputation as a provider of an entertaining experience should serve as the catalysts for more fundamental growth. Despite the company's strengths it trades at a reasonable P/E ratio of 21 versus 19 for the S&P 500 as a whole making it slightly overvalued but worth it for a company of this quality.  

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William Bias owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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