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Will Disney Restart Dividend in 2022?

By Parkev Tatevosian, CFA – Jan 9, 2022 at 1:40AM

Key Points

  • Disney's cash balance is higher than at any time before the pandemic.
  • Disney is generating billions in free cash flow.
  • The omicron variant could cause management concern and caution on restarting the dividend.

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The House of Mouse paused its dividend payout at the pandemic onset to preserve cash.

The Walt Disney Company (DIS 1.09%) was devastated by the circumstances of the coronavirus pandemic. The House of Mouse was forced to shut its doors to several lucrative operations, including theme parks. Management realized the potential cash drain it could cause the company and acted quickly to shore up the balance sheet. 

One action management took was to pause the payment of Disney's semi-annual dividend. The move would save the company from sending billions in cash from its balance sheet. The pause was announced on May 5, 2020, and has persisted throughout the pandemic despite Disney's improving performance. That has some investors speculating that Disney may restart its dividend in 2022. Let's look at some factors that management could consider when deciding to resume Disney's dividend payout.

Children eating cotton candy.

Image source: Getty Images.

Most factors point to Disney restarting its dividend in 2022

Interestingly, by not issuing a semi-annual dividend, Disney saves $1.6 billion in cash based on the $0.88 per share dividend it paid in January 2020. That's $3.2 billion per year that can go a long way in securing Disney's balance sheet from any disruption caused by the pandemic.

Speaking of Disney's balance sheet, it had $15.9 billion of cash and $13.3 billion in accounts receivable as of Oct. 3. To put those figures into context, the most cash Disney held on its balance sheet before the pandemic was $5.4 billion in 2019. To protect itself from any unforeseen circumstances resulting from the unpredictable nature of COVID-19, the company is holding onto a small treasure on its balance sheet. Out of that cash hoard, it could pay three years of its $1.6 billion semi-annual dividends before the cash balance fell to the pre-pandemic high. That is assuming, of course, it does not lose money on operations during that time.

Cash balance is not a constraint for Disney resuming its dividend. What about cash flow from regular operations? In its fiscal year 2021, which ended Oct. 3, Disney generated $5.5 billion in cash from operations. Even after investing in necessary items for business operations, it earned a free cash flow of nearly $2.4 billion. That figure may prove to be a minor constraint as few companies like to spend more on dividends than they earn in free cash flow. In this instance, at the previous rate, Disney's annual dividend would total $3.2 billion and would be higher than 2021's free cash flow of $2.4 billion.

Still, management may be willing to tolerate the slight imbalance in the near term considering its massive cash balance and a recovering business. However, one obvious factor that could keep Disney from restarting its dividend is the direction of the COVID-19 pandemic. The surge in new cases caused by the omicron variant could throw a wrench in Disney's recovery. 

The verdict 

Disney could probably restart its dividend in 2022. Admittedly, the odds are higher for it to resume payments later in its fiscal year. That would give Disney time to evaluate any changes to the momentum in its recovery caused by the omicron or any other variant that emerges. Note, however, that it wasn't necessarily the outbreak of coronavirus that caused Disney to pause its dividend but the government-mandated closures of its theme parks and several other businesses. With more people now vaccinated against the coronavirus, further lockdowns may not happen, making the case to resume its dividend more likely in 2022

Parkev Tatevosian owns Walt Disney. The Motley Fool owns and recommends Walt Disney. The Motley Fool has a disclosure policy.

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