The results of Walt Disney's (NYSE:DIS) fiscal second quarter (ended March 28, 2020) showed the impact of the actions the company has taken to control COVID-19's spread. Closing its theme parks and halting cruises primarily hurt revenue and profitability in its parks, experiences, and products segment. Its other businesses, such as media networks and direct-to-consumer and international, also felt the effects, since there was less original content for sports and other programming, which hurt viewership and advertising.
In total, management estimated the coronavirus pandemic slashed Disney's pre-tax quarterly profit by $1.4 billion. This brought this year's figure down to $1.1 billion compared to last year's $7.2 billion. However, the year-ago figure includes $5 billion of other income that was primarily due to a one-time gain when Disney doubled its stake in Hulu to 60%.
With the company's U.S. theme parks remaining closed, film releases delayed, and live sports halted (hurting its ESPN networks), Disney will feel the effects in the third quarter. Although there are some positive signs, such as the company opening up its theme park in China and taking reservations at Florida's Walt Disney World starting on July 1, Disney's near-term future remains murky. With that as a backdrop, Disney decided to skip the semiannual dividend it usually pays in early July. Typically, a company not making its regular payout sends a negative signal to investors. These times are atypical, however. The key question for investors, then, is whether this is a sign of the times or a sign of things to come.
Lots of cash
For starters, Disney has plenty of cash, ending the quarter with $14.3 billion compared to $5.4 billion at the end of fiscal 2019. The company did increase borrowings from $47 billion (35% debt/total capital) to $55.4 billion (38% debt/total capital). Typically, lower debt levels are preferable, but it is certainly understandable that Disney is building its cash coffers.
Still, even with last quarter's challenges, free cash flow was $1.9 billion, down 30% from the year-ago period. With a greater impact on fiscal third-quarter results as shutdown orders spread outside of China to the rest of the world, I expect to see pressure on Disney's free cash flow in the short run, but it should perk up once worldwide economies are back on their feet.
Management has taken several steps to preserve cash, including reducing discretionary spending on items like marketing and capital expenditures. The company also lowered management's pay and furloughed more than 120,000 workers. Laying off employees (even while paying their benefits) and also paying shareholders the regular dividend would have been bad optics at the very least. Even with reduced economic activity, I expect the board of directors will resume its dividend when Disney reopens for business. After all, there aren't any long-term issues confronting Disney.
Disney is more than a mere media conglomerate; it has a collection of first-class properties. This gives me confidence that its dividend suspension will prove temporary.
Of course, there are theme parks. Beyond that, it owns the ABC, Disney, and ESPN networks and produces and distributes movies under Walt Disney Pictures, Marvel, Lucasfilm, and Pixar, to name a few. Last year, Disney acquired Twenty-First Century Fox, adding its film and television studios as well as cable networks. The $71 billion purchase added strong assets, like the X-Men and Fantastic Four franchises.
Last November, the company launched a new streaming service, Disney+. This created a new distribution outlet that is growing by leaps and bounds: It already has more than 50 million paid subscribers. Management has wisely grown the service, particularly during the coronavirus pandemic. For instance, it quickly released the movie Onward to Disney+ after a its theatrical release faltered due to movie theaters shutting down. Disney+ has also continued to build content to draw subscribers, including original programming -- and the popular play Hamilton will appear on the service in July.
Granted, going without your expected dividend payment is a tough pill to swallow. But Disney has a great track record, and with these terrific media assets, there is no doubt the company will bounce back strongly.