After suspending its dividend at the start of the COVID-19 pandemic, Walt Disney's (DIS 0.15%) management recently said it thinks it'll be ready to start returning cash to shareholders again in the near future.
CEO Bob Iger said during Disney's first-quarter earnings call that he intends to ask the board to reinstate the dividend by the end of the year. The move will coincide with various cost-cutting measures implemented this year, and a push toward profitability in the streaming business. And while management said the dividend will be modest to start, it expects it to increase over time as its earnings improve.
Firm plans to reinstate the dividend, even if a modest payout, is a sign of confidence from management. And it may signal to investors interested in the company that now's a good time to buy shares.
Reducing expenses and increasing cash flow
Disney has a few things to get in order before it can reliably start paying a dividend again.
Importantly, Disney's free cash flow has plummeted since the start of the pandemic. Over the last 12 months, free cash flow totaled less than $100 million. That compares to $3.6 billion in fiscal 2020 and $9.8 billion in 2018.
There are several factors at play. Disney added a lot of debt to its balance sheet with its acquisition of 21st Century Fox. It's also investing heavily in its direct-to-consumer business. On top of that, its Parks business suffered amid the COVID-19 pandemic.
But the company is showing improvements on all of those fronts. Revenue is set to improve across the board as park attendance recovers and streaming numbers improve. Analysts currently expect $8.4 billion in revenue growth for the year.
Additionally, the company is working to get costs under control. It's targeting $5.5 billion in cost savings across the company. $2.5 billion of that will come from reducing SG&A expenses, including marketing, technology, and personnel. To that end, the company announced a round of layoffs that will impact 7,000 employees. The other $3 billion will come from reduced content investments and a renewed focus on content that drives results for its film, networks, and streaming businesses.
Is now the time to buy Disney?
If you were waiting for Disney to pay a dividend before you bought shares, you might be disappointed with its plans.
Disney's dividend was pretty meager before the pandemic, and it might be even scanter when it reinstates the payments next year. Disney shares previously yielded around 1.5% with its semi-annual payment of about $1.6 billion. Speaking of the new dividend potential, CFO Christine McCarthy told analysts "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."
Investors hoping for yield would be better suited with numerous other investment options that offer much better yields on the investments. 10-Year Treasury Notes, for example, currently yield around 3.8%.
But asking the board to reinstate the dividend signals confidence in the ability to improve earnings and free cash flow over time. It's a stronger signal than a share repurchase program, as there's much more commitment to dividends than buying back shares.
So, investors interested in a stalwart media company with strong prospects for profit growth over the next few years may be more interested in picking up shares. Considering the share price remains well below its all-time high from early 2021 and its price-to-sales ratio remains near its historic low, it looks like a great opportunity to buy shares.
