Walt Disney's magical world of animation has come a long way over the last century, turning into a full-fledged multimedia juggernaut. Today, The Walt Disney Company (DIS +0.05%) comprises theme parks, resorts, and cruises all over the world. In addition, the company is arguably the largest name in the film industry and is the home to popular franchises such as Marvel Studios and Pixar.
While Disney is a market leader in the media landscape, the company certainly faces its share of challenges. The company's executive suite has recently experienced some turbulence as legendary former CEO Bob Iger took the reins again in late 2022 after his retirement in 2020. Disney recently reported its first-quarter fiscal 2023 earnings and investors already have a lot to unpack. Let's dig in.
Cost-cutting should be no surprise
From a macroeconomic standpoint, investors should keep in mind that inflation is beginning to cool down and the unemployment rate is declining. While these are typically signals of a healthy, improving economy, some corporations, particularly in Big Tech, are making some interesting moves.
Companies such as Microsoft, Alphabet, Amazon, Meta Platforms, and Salesforce.com are all enforcing layoffs in an effort to reduce costs and preserve cash. Despite the improving results in the broader economy, investors are learning that key variables such as contract sales cycles are increasing in length, and enterprises across different industries are tightening budgets. For this reason, while many companies are still generating revenue growth, the pace at which this growth occurs is beginning to slow, which affects cash flow, profitability, and a company's ability to invest.
Like its Big Tech cohorts, Disney is one of the latest companies to announce layoffs. During the earnings call, Disney's management team explained to investors that the company is targeting $5.5 billion in cost savings and reducing its workforce by 7,000 employees. Of these reductions, approximately $3 billion will come from Disney's content costs, as Iger remains laser focused on improving operating margins in the company's streaming business, Disney+.
According to the company's investor presentation, Disney+ has 161.8 million subscribers worldwide -- a decrease of 2.4 million subscribers from the prior quarter. Despite the decline, global average revenue per user (ARPU) increased marginally from $3.91 last quarter to $3.93 at the end of December. Investors should be keenly aware that the increase in ARPU was likely driven by a price hike, and not from increased user acquisition.
Image source: Getty Images.
Dividends could pay off in the long term
Generally speaking, investors have a binary reaction when a company announces layoffs. In certain cases, like Salesforce.com, the stock experiences a fleeting jolt as investors praise the cost-cutting decisions. In other cases, investors may be spooked by such drastic initiatives and sell the stock, leading to a decline. In the case of Disney, the stock price rose about 3% the day after its earnings report, but now trades roughly 5% below its pre-earnings stock price.
Long-term investors are better off zooming out and digesting the full picture. For example, on the earnings call, Disney's management team explained that during the peak of the COVID-19 pandemic, the company suspended its dividend in an effort to conserve capital.
Given the billions of dollars that Disney can save from its cost-cutting, Iger and his team have asked the board of directors to approve a dividend reinstatement by the end of the 2023 calendar year. Disney CFO Christine McCarthy stated: "Like Bob [Iger] mentioned, given our recovery from the pandemic, strong balance sheet, and commitment to cost cutting, we believe we'll be on track to declare a modest dividend by the end of this calendar year. 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."
While the dividend will be small, investors should be encouraged that Disney is putting shareholder value first and doing what it can to retain enthusiasm for the stock in the long term.
NYSE: DIS
Key Data Points
Keep an eye on valuation
Valuation can be a tricky subject. In some ways, it's more art than science. However, investors should always try their best to analyze the underlying fundamentals of a business and assess its fair value.
At this writing, Disney stock trades at a whopping 58 times its trailing-12-month earnings. For reference, the long-run average of the S&P 500 is 15 to 16 times price-to-earnings. Despite the disparity, investors should acknowledge that the pandemic greatly affected many aspects of Disney's business, specifically theme parks and cruise lines, and the company is still transitioning to pre-COVID levels. In addition, Disney's major investment in streaming and the volatility in travel both have short-term impacts on profitability.
While Disney is not necessarily a screaming buy at the moment, Iger and his team certainly have a solid plan to return to growth mode. Prudent investors are best off assessing future earnings reports and learning if the company is on track with its cost-cutting and dividend declaration initiatives. Should Disney improve its bottom line and execute its strategic plan, the stock could be a great long-term addition to your portfolio.
