On the back of remarkably strong financial performance during the last year, Disney (NYSE:DIS) has recently announced a big dividend increase of 34%. The dividend yield is not particularly exciting at 1.25%; however, the House of Mouse is in a position of extraordinary strength to continue delivering substantial dividend growth in the coming years.
Growing cash flows and increasing dividends
Disney's fiscal year ends in September, and 2014 has been a record year for the company. The studio division launched several widely successful movies, such as Guardians of the Galaxy, Maleficent, Captain America 2, and Frozen. The latter became the most successful animated movie of all time and is showing amazing franchise potential.
The beauty of Disney's business model is that success in the movies division is not only a big profit contribution per se, but it also has a considerable positive impact on other business segments. For example, sales of Frozen merchandise are booming thanks to the massive success of the movie.
Robert Iger, Chairman and CEO, highlighted in the press release how record results are the main factor driving dividend growth for Disney:
Disney delivered the highest results in its history in fiscal 2014, reflecting the extraordinary quality of our creative content and the unparalleled strength of our brands. We achieved record revenue, net income and earnings per share for the fourth year in a row, and we are delighted to be able to increase our shareholder dividend by 34% while continuing to invest for future growth.
Profits are typically hard to predict in the entertainment industry; however, Disney is no average industry player by any means. The company owns several of the most valuable brands in the business, and it has the intellectual rights to profit from many of the most popular and beloved fictional characters in the world. Besides, factors such as human talent and marketing power are huge competitive advantages for Disney.
With the acquisition of tremendously valuable companies like Pixar, Marvel, and Lucasfilm, the magic factory looks stronger than ever, and Disney has exciting plans for the future. Notoriously, the long-awaited Avengers sequel, Age of Ultron, will be in theaters next May, and the next Star Wars movie, The Force Awakens, is scheduled to be released on December 18 of 2015.
The business is a cash-flow-producing machine, Disney brought in $6.5 billion in free cash flows during the fiscal year ended on September 27. Management allocated $6.5 billion to share buybacks and $1.5 billion to dividends during the year, so buybacks are a priority over dividends when it comes to capital distributions.
However, dividends are still growing at an amazing speed: What was an annual payment of $0.35 in 2009 has increased to $1.15 per share after the recently announced hike. Considering the company's cash flow generation capabilities, prospects for growth, and willingness to reward investors with growing capital distributions, chances are this fairy tale for dividend investors is just getting started.
When investing in dividend stocks, the trajectory of dividend payments is of utmost importance. Disney does not offer a particularly big dividend yield, but those dividends are poised to continue increasing materially over time. This should send a powerful signal to investors in terms of the company's quality and fundamental strength.