Walt Disney (DIS -0.04%) has certainly had its fair share of setbacks over the past few years. COVID-19 and a host of macroeconomic challenges have conspired to make things somewhat dreary for the Happiest Place on Earth.
Fortunately, there's reason to believe better times are ahead for Disney and its shareowners. Here's why the next bull run in the stock price might be just around the corner.
1. Its streaming business is on a path to profitability
In just a few short years, Disney has achieved impressive scale in its streaming operations. The entertainment company ended 2022 with nearly 162 million Disney+ subscribers. Along with another 48 million customers for Hulu and 25 million for ESPN+, Disney's combined total of almost 235 million streaming subscribers now compares favorably to Netflix's 231 million customer base.
Disney's unrivaled content library has fueled its growth. Now, having invested heavily in new shows to ensure Disney+ was well-received by consumers after its 2019 launch, the company can moderate its content spending.
The company plans to focus on its core franchises, such as the Marvel Cinematic Universe and Star Wars. A steady cadence of new releases based on Disney's most popular characters and storylines should be more than enough to retain existing customers as well as entice more people to subscribe.
Disney expects to save about $3 billion annually with its new content schedule. Management is also targeting another $2.5 billion in operational efficiencies. This $5.5 billion cost-saving plan is intended to help the company achieve its goal of building Disney+ into a profitable business by the end of its fiscal 2024 and boosting Disney's overall earnings power.
Profit margins are already moving in the right direction. Its direct-to-consumer segment, which houses its streaming operations, saw operating losses narrow from $1.5 billion in its fiscal quarter (ended Oct. 1) to $1.1 billion in the quarter ended Dec. 31.
Cost cuts, combined with recently enacted price increases, should help to shrink these losses further in the coming quarters. Thus, Disney+ appears to be on track to begin generating significant profits by 2025, and perhaps even sooner.
2. Disney could reap billions from asset sales
Disney has other intriguing options that could help to accelerate its profit push. Analysts at Citigroup believe Disney will sell its two-thirds stake in Hulu to cable company Comcast (CMCSA 1.85%), which owns the remaining one-third of the streaming service. Disney's deal with Comcast values Hulu at $27.5 billion, so a sale could add over $18 billion to Disney's coffers.
Citigroup's researchers posit that Disney could use the cash it receives from a potential sale to pay down its debt and buy back its shares, both of which would help to boost its earnings per share. Selling Hulu would also allow it to concentrate its content investments on its core Disney+ service.
And the company could choose to sell ESPN. Disney recently restructured its operations from two divisions to three, making ESPN a separate operating segment in the process. The realignment should make it easier to uncouple the sports leader from Disney's other operations should a sale occur.
Cord-cutting has dented ESPN's cable operations, but it's still a highly profitable business, so selling it would likely bring in even more money than a sale of Hulu. Selling ESPN could also lessen the risk for Disney's investors as the parent company would be less exposed to the cable industry's steadily declining subscriber figures.
3. Dividends are on the way
Disney was forced to suspend its cash payout to its investors in the spring of 2020. Back then, its parks and resorts were forced to close by the pandemic. Disney estimates that it lost billions of dollars of cash flow due to these and other pandemic-related challenges.
Its theme parks are now back in business, and its finances are on much firmer ground. Moreover, management is confident in its goals for cost reductions and streaming profitability. Disney, therefore, intends to resume its cash payments to shareholders.
During the company's earnings call on Feb. 8, CEO Bob Iger said, "Now that the pandemic's impacts to our business are largely behind us, we intend to ask the board to approve the reinstatement of a dividend by the end of the calendar year." Iger added that Disney's initial dividend would be "modest" and that the company would look to increase it over time.
Although Disney's yield will likely be low to start, reinstating its cash payout should put its stock back on the radar of income-focused investors, particularly those who value dividend growth. That, in turn, could heighten demand for shares and help to drive up the price in the coming year.
