Despite monster first-quarter, fiscal 2022 numbers and upbeat guidance, Walt Disney (DIS 1.54%) stock is hovering around a 52-week low as investors grapple with lower profitability and Disney's place among a cluttered cohort of streaming-service companies.
Let's dive into Disney's dividend history and the state of the company to see if management's lack of interest in reinstating the dividend is affecting the company's long-term investment thesis.
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Companies have brands, and so do stocks
Like Nike, Coca-Cola, and McDonald's -- Disney is one of the most recognizable American brands in the world. But just as companies have brands, so do stocks.
We use labels all the time for stocks -- dividend stock, growth stock, value stock, blue-chip stock, etc. These different kinds of stocks appeal to different investors. For example, retirees with a shorter investment horizon are more concerned with capital preservation than outsized returns. So retirees tend to gravitate toward safe and reliable stocks that pay dividends that can be used as a passive income stream in retirement.
Investors with a long-term time horizon may prefer growth stocks that offer greater upside potential even at the expense of higher risk. Since younger investors have the majority of their high-income years ahead of them, they tend to be better suited to incur heavy losses or ride out the volatility.
Disney's dividend problem
With the addition of Disney+, Disney the company is as diversified of a business as ever. But Disney the stock is having trouble finding its new identity after suspending its dividend and transitioning from a blue-chip stock to a growth stock due to the addition. Disney is a component of the Dow Jones Industrial Average and the S&P 500 that was known to reinvest in the business and pass along some profits via the dividend. Disney's dividend raises were inconsistent. Nevertheless, between 1962 and 2019, Disney paid a dividend every single year.
I get the sense that the market is struggling right now to value Disney given the growth of Disney+, the relatively recent rebound at the parks, and the uncertain future for movie theaters that Disney's feature films depend on for box office revenue. Disney+, which went live in 2019, added a growth avenue to Disney's business but has also impacted the company's short-term profitability. The COVID-19 pandemic was the nail in the coffin because Disney was losing money and couldn't afford its dividend. Cutting the dividend saved Disney about $3.2 billion in 2020. Disney has shown no interest in reinstating the dividend anytime soon. The word "dividend" was mentioned zero times on Disney's most recent earnings call for Q1 fiscal 2022. Disney stock's "investor profile" has changed. And the market needs time to digest that change.
To reinstate or not to reinstate
Like Disney, Ford Motor Company (F 0.47%) was a longtime dividend-paying company that cut its dividend entirely in 2020. And like Disney, Ford is in the process of a massive transformation in its business that requires accelerated investment in electric vehicles as Ford seeks to remain relevant in a world shifting toward decarbonization. Ford recognizes the importance of the dividend to its typical shareholder. In fact, the company discussed this value-add on its recent Q4 2021 earnings call, saying a key reason behind the company's reinstatement of a $0.10 per-share quarterly dividend was that it is important for the company's shareholder base. As Ford evolves as a company, Ford stock can now cater to different kinds of investors because it has growth prospects and a 2.5% dividend yield. The same can't be said for Disney stock.
The importance of a dividend
In the past, Disney stock often had a dividend yield below 2% -- which is hardly high enough to justify holding the stock as a passive income vehicle. However, a dividend adds a lot more to the investment thesis than just the yield. For many investors, a dividend can be symbolic of consistency and a willingness to share profits directly with investors.
Companies that pay dividends add an extra incentive for investors to hold their stock long-term. This quality is especially important during a bear market because investors are able to hold paper losses while collecting income from dividends. Put another way, an investor can still book gains without having to sell stock at a lower price.
An investment worth considering now
There has been a profound shift in the kind of investor that Disney may attract. Disney's apparent lack of interest in reinstating the dividend signals the company is more focused on growth as a means to drive shareholder value than buybacks or dividends. Warren Buffett's Berkshire Hathaway, for example, famously doesn't pay a dividend despite owning several dividend-paying stocks because Buffett argues he can create more value for the investor by retaining earnings and investing in the businesses than distributing the earnings to investors.
Not all large companies have to pay dividends. In fact, many of the best companies either pay a small dividend or none at all. It's just that if a company isn't going to pay a dividend, there's added pressure for that company to make due on its promise to allocate capital wisely.
Disney has yet to prove that Disney+ can achieve long-term profitability. And for that reason, Wall Street may be taking a wait-and-see approach to Disney stock right now. But for investors who believe in the long-term value of Disney+ in addition to Disney's parks and studio entertainment business, cable, licensing, merchandise, and other media-related revenue streams, the sell-off in Disney stock could be a juicy buying opportunity.
