The Walt Disney Company (DIS -1.01%) suspended its semiannual dividend in the first half of 2020 as the COVID-19 pandemic wreaked havoc on its business. That move made sense -- the movie theater business was decimated in those early months, and the company's parks were closed or subject to capacity constraints. By suspending the dividend, Disney preserved about $1.6 billion in cash every six months.
While Disney's various businesses have largely bounced back, the company has yet to reinstate the dividend. Part of the problem is spending. Disney has been pouring cash into its streaming services, racking up massive subscriber figures and equally massive losses. In the first quarter of fiscal 2023, which ended on Dec. 31, the direct-to-consumer segment posted an operating loss of over $1 billion.
With Bob Iger back as CEO, the company's priorities are shifting. Disney anticipates restarting dividend payments by the end of this year, fueled by a newfound focus on cost-cutting and efficiency.
Not quite ready for a dividend
As it stands today, Disney is in no position to be paying a dividend. The company's cash balance has plunged by nearly $6 billion over the past year. Free cash flow in the first quarter alone was a loss of $2 billion, and Disney's $48 billion in debt generates annual interest payments of around $1.2 billion.
Disney is waiting until the end of the year to attempt to restart the dividend because it will take time to bring costs down. The company announced a broad restructuring effort along with its first-quarter results that will make dividend payments possible.
Disney is shooting for total cost savings of $5.5 billion. Non-content cost reductions are targeted at $2.5 billion, while content savings should come in at around $3 billion. The company will also be eliminating 7,000 jobs as part of this restructuring plan.
Around half of the non-content cost savings will be taken out of marketing, with 30% coming from labor and 20% from everything else. Those savings should be fully realized by the end of fiscal 2024, while the content-related savings will take longer to accomplish. The company still expects cash spending on content of around $30 billion this year.
Starting small
While Disney really can't afford to pay a dividend right now, the goal is to reach a point by the end of the year where it can afford to reward shareholders. Assuming the company hits that goal, the initial dividend payment will be small. "The amount will likely be a small fraction of our pre-COVID dividend with the intention to increase it over time as our earnings power grows," said CFO Christine McCarthy during the first-quarter earnings call.
Starting small is probably a good idea, given that a potential recession this year could put some pressure on Disney's parks business. As the company brings its streaming business out of the red and into solid, sustainable profitability, it should have no trouble eventually boosting the dividend to pre-COVID levels. Investors will just need to be patient.
