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Activist Investor Dan Loeb Urges Disney to Cancel Its Dividend and Make More Disney+ Content Instead

By Anders Bylund – Oct 8, 2020 at 1:02PM

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The change would generate a massive return on the investment and establish Disney as a global video-streaming leader, Loeb said.

Activist investor Dan Loeb of the hedge fund Third Point wrote a letter to Walt Disney (DIS -1.21%) 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 (NFLX 0.03%), 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.

Anders Bylund owns shares of Netflix and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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