Companies that generate stable cash flows, have strong balance sheets, are industry leaders, and have been around for decades tend to be the kinds of businesses that investors can count on to outlast an economic downturn. There's no doubt that Walt Disney (DIS 1.54%) is the leader in the entertainment industry. After all, it is one of just two communications stocks (along with Verizon Communications (VZ 2.85%) in the Dow Jones Industrial Average (DJIA).
But unlike Verizon -- which has the highest dividend yield of any DJIA component at 5% -- Disney is just one of three DJIA components that does not pay any dividend. (In case you were wondering, the other two are Boeing and Salesforce.) Here's why Disney doesn't need to pay a dividend but could reinstate it in a few years.
Image source: Getty Images.
Disney's dividend history
Despite its multi-decade reputation as a blue chip value stock, Disney never had a very good dividend track record. It would go years without raising its payout and often sported a below-market average dividend yield. By 2019, Disney was only paying semiannual dividend payments. Then, in 2020, it cut its dividend in response to the COVID-19 pandemic, which took a sledgehammer to its bottom line and resulted in its first annual loss in decades.
In fiscal 2019 -- the last full year Disney paid a dividend -- the dividend payment cost the company $2.9 billion. While the payout provided a decent stream of passive income to shareholders, Disney's long-term growth plans suggest that money is better spent reinvesting in the business.
Disney's midterm goals
Rolling out Disney+ has cost the company a fortune -- with $32 billion in projected fiscal 2022 content spending alone across Disney's linear networks (cable), direct-to-consumer segment (DTC), and studio entertainment segment. DTC operating losses for the first quarter of its fiscal 2022 were a painful $593 million. But it got even worse in the second quarter when DTC reported an operating loss of $887 million -- for a total of $1.48 billion in the first half of fiscal 2022.
Coincidentally, DTC's operating losses are roughly what the company would have paid if it kept its semi-annual dividend. So, by not paying a dividend, Disney can essentially afford to take losses on its DTC segment.
The losses should be temporary as the company forecasts Disney+ will be profitable by fiscal 2024. The game plan is to build out Disney+ with strong original content, move blockbusters to Disney+ after they leave theaters, build up the subscriber base, reach 230 million to 260 million total subscribers in fiscal 2024, and then pull back on spending to make Disney+ profitable.
Disney's long-term goals
If everything goes according to plan, Disney should be roaring in fiscal 2025. By then, inflation should be cooled off, the Federal Reserve will likely be done raising interest rates and could even be back to lowering rates, and the economy could return to expansion mode. Therefore, investors could expect fiscal 2024 or 2025 to see record revenue and earnings years for Disney.
But even if Disney faces a few more hiccups, the multi-decade growth story looks stronger than ever. Disney's parks have proven their resilience and rebounded faster than expected from the pandemic. The variety of movies and shows being produced -- and the reception by fans -- indicates that Disney's content-creating engine is humming along.
Disney is in the business of creating memories and entertaining folks of all ages, both on-screen and in person. Disney+ plays a pivotal role in Disney's media suite. With the stock down over 45% from its all-time high, and with Disney's best years arguably still ahead of it, Disney looks like an excellent long-term buy now.
