Activist investor Dan Loeb of the hedge fund Third Point wrote a letter to Walt Disney (NYSE:DIS) CEO Bob Chapek on Wednesday, asking him to permanently suspend Disney's dividend and redirect those funds to make original content for the Disney+ streaming service.

"We share the view that Disney is embarking on one of the most important transitions in its history: shifting distribution of the world's most iconic entertainment brands from the box office to the home," Loeb wrote. "Disney+ has made admirable early progress."

In order to make the most of this once-in-a-generation opportunity, he said, Disney should stop paying dividends and invest the resulting savings of $3 billion a year into streaming content. Some of the new content would naturally spill over into the Disney-owned Hulu service, but Disney+ should see the lion's share on additional funding.

Redirecting Disney's cash flows to boost Disney+ would yield returns on the investment many times Disney's 1.4% dividend yield, Loeb said. He highlighted the example of the Broadway hit Hamilton, which generated at least $200 million of incremental Disney+ subscription fees from an original investment of $75 million.

A movie clapper resting on a pile of hundred-dollar bills.

Image source: Getty Images.

"We are fully confident that scaling that $75 million to several incremental billions and focusing that spend on Disney's iconic in-house brands like Marvel, Star Wars, Pixar, and Disney Animation as well as selected acquisitions would drive even greater subscriber growth for Disney+, and subsequent value creation for Disney's shareholders," Loeb wrote.

The proposed reallocation of dividend funds would also lower the churn on the Disney+ platform over time and boost the lifetime value of each additional subscriber. The long-term returns on this investment could make Hamilton's success look forgettable in comparison. In the end, Disney could establish itself as a second global video-streaming giant in the mold of Netflix (NASDAQ:NFLX), Loeb argued.

The move would be timely in the light of movie theaters closing down and internet-powered home theaters playing a growing role in the entertainment industry.

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