Imagine sitting back in your armchair and earning income without doing a single thing. This might sound like a dream, but if you own a dividend stock, it's actually reality. These players pay you just for owning them. So it's no surprise many investors eagerly add these sorts of stocks to their portfolios, to boost gains during good times and limit losses during bad times.
Many big companies offer you this opportunity. And soon, an entertainment giant could rejoin the list. I'm talking about Disney (DIS -0.50%). The company suspended its dividend in 2020 as the pandemic weighed on business. But management now says it's almost ready to resume payments. Could it become a top dividend stock?
Image source: Disney.
The pandemic's impact
First, let's talk about why Disney halted dividend payments in the first place -- and why it may soon restart them. The pandemic weighed heavily on it, forcing it to close some theme parks for as long as a year.
Theme parks are part of the Disney business unit that generally contributes the most to revenue. The closures pushed it from annual profit to a loss, and during these tough times, the company suspended its dividend.
Though the reopening of parks lifted earnings, difficulties persisted as the company's efforts to gain streaming subscribers pushed costs higher. And that meant the time still wasn't right for dividend payments to shareholders.
But things are turning around at the company. In November, Disney brought back longtime chief executive officer Bob Iger to usher it into a new era of growth. He immediately made significant changes such as restructuring management, cutting jobs, and reining in spending. The efforts are starting to bear fruit.
Disney is set to beat its goal of $5.5 billion in cost savings, and it has already improved the operating income at its streaming service, known as the direct-to-consumer (DTC) business. DTC reported an operating loss of about $500 million in the most recent quarter, versus an operating loss of $1.5 billion just three quarters ago.
Improving free cash flow
All of these moves have made an impact on Disney's free cash flow, which is improving. And that trend means the company might have what it takes to resume dividend payments.
DIS free cash flow data by YCharts.
In the most recent earnings call, echoing comments made earlier this year, interim chief financial officer Kevin Lansberry said Disney should be ready to pay a "modest" dividend by the end of the calendar year. The board of directors will have to approve the proposal, but earnings progress so far offers us reason to be optimistic.
Now, let's consider Disney's dividend history. The company paid a dividend for more than 40 years and generally increased payments over time. The yield in recent years ranged from 1.2% to 1.5%, which isn't particularly high compared to industries such as pharmaceuticals and utilities. Those industries offer average yields of more than 2% today, according to data from the New York University Stern School of Business.
Iger's dividend policy
So, while Disney offered dividend growth, it wasn't among the market's strongest players. If the company does resume payments in the near future, I wouldn't expect its policy to change significantly, for two reasons. First, it's likely Iger will continue the dividend strategy he had in place during his 2005 through 2020 tenure as CEO. Second, the company remains in a recovery phase and still must invest in areas that will drive long-term growth. So it probably will limit how much it allots to dividends.
Now, let's get back to our question: Will Disney become a top dividend stock? By now, I think you know what my answer will be: No, or at least not in the near term. So you might not specifically want to buy the stock for potential dividend payments, but you might consider buying shares for the total picture: Iger's plan is progressing, long-term earnings prospects look bright, and the possibility of even a small dividend is icing on the cake.
All of this means Disney might not be the next big dividend stock, but it still could make a great addition to your portfolio.
