One of the bigger surprises out of Walt Disney's (DIS 0.34%) well-received fiscal first-quarter earnings call was that it would be bringing back its dividend by the end of this calendar year. The media giant suspended its payouts in early 2020, bracing for the impact of the COVID-19 crisis.
The last cash distribution came near the end of 2019, so the dividend drought will have lasted four years when Disney resumes the return of money to its investors. It may seem like a good thing. Nature is healing. It's a return to normalcy.
But this doesn't really have to happen. Let's go over some of the reasons why Disney starting to cut shareholder checks isn't necessary right now.
Image source: Disney.
Wishing well
Shares of Disney are down 25% since its last distribution went out on Dec. 13, 2019. It's not the lack of a dividend that has held the stock back. Disney was the worst performer on the Dow in 2021 because growth was slowing at Disney+. It was near the bottom again in 2022 because losses were mounting for the namesake streaming service.
Bringing back the payouts doesn't change the reasons for the stock's decline. Disney+ still posted an operating loss of nearly $1.1 billion in its latest quarter. Its flagship linear networks face a bumpy near-term outlook with cord-cutting remaining strong and the advertising market taking a hit. We're also on the precipice of a global recession. If Disney suspended its stakeholder disbursements to save the company ahead of the pandemic's financial calamity, won't it happen again if the economy falters in the next year or so?
Let's also talk about the poor optics here. Disney announced that it's bringing back its dividend at the same time that it revealed it would be laying off 7,000 employees. The pink slips will make up a small part of the $5.5 billion in annual savings that Disney is hoping to achieve, but it's the newsy nugget that resonated the loudest with headline crafters and social media pundits.
Plus, the dividend itself will be largely irrelevant for investors. Based on today's depressed share price, the former dividend rate translates to a 1.6% yield. Disney mentioned during Wednesday's earnings call that the new distribution would be the same if not lower. Think about that. Back in 2019 a 1.6% yield seemed pretty good with money market rates hovering well below that. These days the best funds are shelling out more than 4% without the stock market risk.
Disney resuming its semiannual distributions should help it get back on the radars of institutional investors with dividend requirements. I get that. It's just not going to sway retail income investors who have far safer ways to generate a lot more interest yield right now.
There will be some fanfare as Disney returns to the ranks of the best blue chip dividend stocks. Some will argue that it shouldn't have taken this long. Disney has been profitable since fiscal 2021. It's just not the same. There are some storm clouds on the horizon, and a 1.6% yield -- or likely less -- isn't going to turn heads in 2023.
