Disney (DIS -0.04%) did something important recently. It declared a dividend for the first time since the payment was eliminated during the early days of the coronavirus pandemic. There are a few big takeaways, but I can't help but think the company should have waited to start paying a dividend again. Here's why, despite being a dividend lover, I'm not particularly pleased with Disney's move.
Disney's dividend elimination made sense
When the pandemic hit in 2020, there was a great deal of uncertainty. Nonessential businesses were shut down by the government and people were asked to practice social distancing, all in an effort to slow the spread of the illness. Given that a huge portion of Disney's business is tied to group settings -- like its amusement parks, cruise ships, and the movie theaters that show its movies -- it makes sense that the company suspended the dividend.
The biggest benefit from the move was that it allowed Disney to conserve cash. The drawback was that the company let down investors who had come to count on the dividend. Also, some large investors, like pension funds and insurance companies, have requirements that they only invest in dividend-paying companies. So there were bigger issues at play as well.
But after the cut, Disney was quickly in a position that required it to rebuild trust with investors. So the dividend resumption announced in late 2023 was important (the dividend will be paid in early January 2024). But at $0.30 per share, I'm not at all pleased with this decision (and I love dividends!). It would have been better if Disney had chosen to pay just a token dividend (perhaps $0.01 a share) to allow dividend-limited institutional investors to own the stock again.
Image source: Disney.
The problems aren't over by a long shot
The reason for my concern is that while Disney's problems aren't as dire as they seemed in the early days of the pandemic, they are still fairly significant. For example, the company's experiences division had a good fourth quarter in fiscal 2023, largely driven by the reopening of the company's Shanghai property. That's good news, but it isn't a long-term growth driver, just a return to normal. In the U.S., performance was mixed, with lower spending at Disney's Florida properties only partially offset by stronger results in California. While not a full-on negative, the experiences segment was also not an unequivocal positive and the lingering impact of the pandemic is still an issue to contend with (specifically within China).
In the entertainment space, Disney has released a string of underwhelming movies. The company admitted it was trying to do too much on the big screen, and it plans to pull back and refocus its efforts. This is more than just a reputation issue, given the interplay between the company's parks and its key movie franchises like Star Wars and Marvel. If Disney can't get its movie plans back on track, it could turn into a bigger problem.
Then there's the transition that's taking place between traditional media consumption via cable and broadcast TV and streaming, which is also hitting the media titan. Profits in the former are falling while Disney's efforts in the latter remain unprofitable. Even if streaming can get into the black, it will only help offset the declines from cord-cutting. Disney is making the right move at the right time, but the transition isn't nearly over yet, and it isn't quite clear how long it will take. Then there's ESPN, which was once a crown jewel asset that simply isn't as valuable as it once was. The company appears to be considering brand partners to help revive the iconic sports brand.
Although Disney is still facing notable problems across basically all of its business, it has reinstated the dividend. That's going to be a drain on cash flow at a time when it could probably better use that cash flow to reinvest in the company. While I understand the importance of regaining trust on Wall Street, the $0.30-per-share dividend is a burden that Disney didn't need to impose on itself.
I'm a Disney fan, but the hard work isn't done yet
My family and I love Disney, so I follow the company's products quite closely. For the most part, the quality is still top-notch, but it is still clear that Disney isn't firing on all cylinders today. Given enough time, the company will probably muddle through this rough patch (and there's a collection of activist investors lined up to prod it in a new direction). But spending cash on dividends that really didn't need to be spent won't help Disney get back on track. And if there's another dividend cut in the future -- not a far-fetched notion given the host of headwinds Disney is facing -- the resumption of the dividend will have caused more harm than good. Conservative dividend investors should probably stay on the sidelines until there's more evidence of the company's business moving in a positive direction.
