It's been a tough few years for Walt Disney (DIS 1.01%) investors. Since the stock hit an all-time high of $201.91 on March 8, 2021, it has been ravaged, losing more than half its value and falling to a 10-year low. Driving the stock lower was a host of concerns about the future of its business. These include the durability of its legacy cable and television business, the unprofitability of its streaming segment, recent weakness at its theme parks, and a dearth of hits this year at the box office.
The House of Mouse finally gave investors back a little of the magic this week. Disney released its quarterly financial report, and the results were surprisingly robust, signaling the company is well on the road to recovery. One of the biggest surprises was the announcement that Disney has plans to reinstate its dividend after a roughly four-year pause.
Let's look at what precipitated the decision, how to view Disney now, and if investors should buy the rebound.
Image source: Disney.
A magical financial quarter
For the company's fiscal 2023 fourth quarter (ended Sep. 30), Disney reported that revenue grew 5% year over year to $21.2 billion. Excluding one-time charges related to its reorganization, diluted earnings per share (EPS) of $0.82 soared 173%.
Investors let out a collective cheer as the results sailed past analysts' consensus estimates, which called for revenue of $20.1 billion and EPS of $0.68.
Further fueling the exuberance was a surge in both operating cash flow and free cash flow, which increased 90% and 149%, respectively.
A stream of good news
One of the biggest attractions was the revelation that Disney's streaming business had made significant progress during the quarter. The direct-to-consumer (DTC) segment cut its losses by 70% year over year, hastening its path to profitability. Disney+ saw an increase of 7 million core subscribers, bringing the total to 112.6 million, about 3 million more than analysts had predicted.
Furthermore, recent price hikes of $3 per month for Disney+ and Hulu's ad-free plans also padded the results, as domestic average revenue per subscriber (ARPU) increased nearly 3% to $7.50. The company also revealed that the Disney+ ad tier had added 2 million more subscribers during the quarter, bringing the total to 5.2 million, which will no doubt be a big selling point to advertisers.
Investors were also pleased to hear that Disney continues to expect its streaming business to achieve profitability by fiscal 2024's Q4.
Disney's overall performance was also helped by a strong showing by the theme parks, which despite tough comps from last year, delivered revenue and operating-income growth of 25% and 30%, respectively, above pre-pandemic levels. On the conference call, CEO Bob Iger noted that over the past five years the return on invested capital (ROIC) had nearly doubled on Disney's domestic parks and that guest-satisfaction ratings had improved.
NYSE: DIS
Key Data Points
Cost-cutting continues
Another notable announcement was Disney's decision to slash costs by another $2 billion above and beyond the $5.5 billion previously announced.
Iger highlighted the company's reorganization, which he said creates "a more unified, cohesive, and highly coordinated approach to marketing, pricing, and programming." The company saw a vast improvement in the operating results across its streaming services, which rose by $1.4 billion during the fiscal year.
ESPN's DTC offering
One of the more ambitious undertakings is Disney's plan to take ESPN, "already the world's leading sports brand," according to Iger, "and turning it into the preeminent digital sports platform." Disney has taken a number of steps to accomplish this goal and is "exploring strategic partnerships to help advance our effort."
ESPN increased revenue and operating income during the fiscal year and generated viewership gains in each of the preceding four quarters, which should help sell the plan to potential partners. Disney's ultimate goal is to launch a DTC version of its flagship ESPN sports channel to counter the shrinking number of cable subscribers. In an interview on CNBC, Iger revealed the company is targeting a launch for the new service in 2025.
A return of the dividend
One of the most exciting developments, of course, is Disney's plan to reinstitute a dividend, which was suspended amid the pandemic in July 2020. At the time, the semi-annual payment of $0.88 resulted in a yield of 1.2%.
During the conference call, interim Chief Financial Officer Kevin Lansberry said because of the strong balance sheet and robust free-cash-flow recovery, "we will be recommending to the board that they declare a dividend by the end of this calendar year." It isn't yet known exactly how much the dividend will be when it's reinstated, though Iger has previously said it would be "modest," at least initially.
It's likely there will be a flood of interest from income investors in Disney's stock now that the rebound has begun and the dividend is returning. Many of the institutional buyers that abandoned ship when the payout was cut will likely return, and the increasing demand could provide another boost to the stock price.
Is Disney stock a buy or a hold?
There was plenty for investors to like in Disney's financial release. The vast improvements in the company's streaming economics, a rebound in its theme-parks performance, the results of Disney's cost-cutting campaign, and its strong cash flow show just how far the House of Mouse has come in just a short time.
From a valuation standpoint, the stock is currently selling for less than 2 times sales and roughly 19 times forward earnings, a significant discount to the price-to-earnings ratio of 24 for the S&P 500. Even after today's rebound, the stock still sits near a 10-year low. If you believe, like I do, that the recovery is well and truly under way, Disney stock is a buy.
