At the pandemic's onset, Disney (DIS -1.93%) moved quickly, plugging holes where cash was escaping. The contagion was new, and little was known about its severity or how long it would last. As a result, management felt the No. 1 priority was to preserve liquidity and ensure survival.
Dividends are optional payments to shareholders. Therefore, shutting off the dividend comes with no immediate cost to Disney. By contrast, borrowing money to maintain the dividend would have meant interest expenses. Consequently, pausing the dividend was the most logical place for management to start conserving cash.
Turning the page to the next chapter, nearly all Disney's theme parks and resorts are again open (though operating at reduced capacity), its films are returning to the big screen, its TV networks again have content, its streaming services are thriving, and its survival through the pandemic is almost certain. So investors are asking: Is it time for Disney to restart its dividend?
Disney is no longer in survival mode
Disney's parks, experiences, and products segment, including its theme parks like Disneyland in California and Walt Disney World in Florida, were the most negatively impacted by the pandemic. Initially, the turnstiles had to be closed to all visitors. And even though most of the theme parks have reopened at limited capacity (Disneyland Paris is still closed), revenue in the segment decreased by 53% in the most recent quarter because of a $2.6 billion impact from COVID-19.
There is light at the end of the tunnel. Disneyland California was finally permitted to reopen with capacity restrictions on April 30. Pent-up demand to visit the park is high. And indications point to tickets selling out soon after they become available.
Still, its theme parks are usually bursting under normal circumstances, and it's no surprise they will be sold out at a limited capacity. In addition, operating a business with a deadly virus lurking is expensive. This is what Disney had to say on the matter in its first-quarter earnings release back in February:
We have incurred, and will continue to incur, additional costs to address government regulations and implement safety measures for our employees, talent, and guests. The timing, duration, and extent of these costs will depend on the timing and scope of our operations as they resume. We currently estimate these costs may total approximately $1 billion in fiscal 2021.
While the worst of the financial damage from the pandemic might be behind Disney, revenue remains constrained, and expenses remain elevated.
Can Disney afford to restart the dividend anyway?
Disney has over $31 billion in cash and accounts receivables, but it also has over $52 billion in long-term debt. In addition to raising cash by suspending its dividend, Disney borrowed over $6 billion by issuing bonds.
Moreover, cash provided by operations in its first quarter decreased by $1.6 billion and barely remained positive at $75 million. Disney is rebounding, and it can see hopeful signs, but it's still barely keeping its head above water. It would be prudent for management to wait at least another quarter of recovery before making the decision to restart the dividend.