There is trouble in the House of Mouse... Mickey's Mikey makes his last stand... the Kingdom has lost its magic.
Pick any of the above statements -- which have certainly become cliche by now -- regarding the tumultuous times at Disney (NYSE:DIS) and you'll succeed in capturing the angst that pervades the hearts of most long-term shareholders -- including myself. The fervent discontent of so many disillusioned institutional managers and individual investors -- plus one very famous dissident, Mr. Roy Disney -- has become an inarguable zeitgeist in the capitalist collective, and there is one lonely figure in the middle of it all... Michael Eisner. I'd like to weigh in on the whole debate. Let me be frank: Eisner must go. But not necessarily for the reason you might think. Read on.
Let me tell you something: I truly feel bad for this guy. When he's at the top of his game, he is nothing less than a shark that knows how to find markets and gobble up disposable income, thereby increasing value for his company's stockholders. Everyone is familiar with the story by now, but here's a quick recap: He was president and chief executive at Paramount Pictures (now a studio subsidiary of Viacom (NYSE:VIA)) back in the late 1970s and early 1980s and had tremendous success there. Before that, he was instrumental in the continued development of ABC as a powerhouse network; he worked with Barry Diller (now head of InterActiveCorp (NASDAQ:IACI)) in both of these positions, and together they became a team to be reckoned with.
And then came the mermaid that seduced his sailing ship: the Walt Disney Company. He joined Mickey and his pals at the behest of one Mr. Roy Disney and did great things there -- he revved up the movie division, presided over a wave of prosperous licensing agreements, merged ABC with the company, completed other logical acquisitions such as the Miramax film entity, and so forth. There is no question that Mr. Eisner is a sharp guy, an unwavering catalyst who has a knack for identifying and financially exploiting trends in the culture.
Then came 1998. The stock is on the proverbial tear, valued at over $100 a share, and it splits at a ratio of 3 to 1 during the summer. Eisner is a demigod -- no wait, that's too insulting because there isn't anything "demi" about him, so he is nothing less than a chief executive deity -- who can do no wrong in the eyes of his minion shareholders. "Bestow upon him all the options the company treasury has in storage" seemed to be the misty-eyed cries of all the little Mouseketeers.
And here's where I come in
Well, guess what? I buy in shortly after the split, around $37 per share, and almost six years later, Disney trades well below $30. So, you ask -- and even if you don't ask, I'll ask for you -- how does that make me feel?
From one point of view, it doesn't bother me at all. I mean that. Sure, it's been six long years of devaluation of a long-term investment, but that's the salient idea here -- it's a long-term investment. Not a fly-by-night speculative equity that I enter at three on a Monday and sell at seven on a Friday. It's a company that is expected to cycle and climax and drop like a rock down a hole and then build a base for many months as it trades sideways in a narrow range depending on any host of macro reasons (such as the Asian economic crisis back in the year of my first purchase). I understand this and am magnanimously prepared for it, in fact. The fluctuating price of its capital component does not frighten me in the least, and Mr. Eisner cannot be held responsible for every hiccup -- even the loss of the Pixar (NASDAQ:PIXR) deal shouldn't be blamed solely on him, since he was looking out for the shareholders' best interest. Additionally, I am reducing my cost basis over time and intend to cash out maybe 30 years into the future. So, how do I feel now?
Terrible. And for this reason: the dividend. You see, I don't mind seeing a zigzagging, helter-skelter chart of an investment vehicle I intend to hold for decades so long as two main requirements are satisfied. First, I have to believe the company is a solid brand and will be around when I no longer understand what the youth are saying (not that I necessarily understand what they are saying now, mind you; I still believe that the term "rad" has something to do with radiation). Second, I need to see a healthy dividend that will only get healthier, until it becomes the Jack LaLanne of payouts.
This is why Eisner must resign as CEO of Disney. The dividend is on its last legs and will soon be on its way to heaven (or, maybe, cryogenically frozen alongside Walt until a cure can be found for it). I feel strongly that most editorials are focusing on the wrong element: The venomous diatribes against Mr. Eisner usually complain about his inability to raise the share price. I choose instead to laser in on his unwillingness to raise the $0.21 payout that has been in effect since 1999. And furthermore, here's another gripe: That share of the profits is doled out in one annual sum. I despise that practice, and here's why: It reduces the probability of dividend reinvestment at a better price. A quarterly dividend gives me four chances in a year, but a lump sum at the end of the calendar affords me only one opportunity to pick up some extra fractions.
You would think Eisner would be embarrassed by his dividend grade, which is a solid F, especially considering his charge's reputation as a sterling member of the elite Dow Jones Industrial Average. Companies such as Coca-Cola (NYSE:KO), Johnson & Johnson (NYSE:JNJ), and Procter & Gamble (NYSE:PG) all have reputations as stalwart increasers of dividends quarter after quarter. To be sure, each one of these concerns has years when their increases aren't necessarily what they've been in the past... but a raise is a raise in my book. Heck, even Microsoft (NASDAQ:MSFT) got on the bandwagon, finally realizing that it was no longer a growth stock... instead, it is now a mature company that will no longer shoot up into the sky like a UFO from a Steven Spielberg production. Mr. Softy, simply put, is a total-return play. Disney is no different.
Coca-Cola will serve as a great personal example. In many ways, Coca-Cola is like Disney -- it peaked in 1998, then went on to lose a lot of its value. I purchased my first shares at $85 each. Since then, I've consistently added more every year, reducing my cost basis to its current $61. Coca-Cola can be had these days for approximately $50 per share. Honestly, I am extremely happy with my Coca-Cola investment, even with the severe capital paper loss I am exposed to; it's the dividend, you see. The dividend is an annual $1.00 per share. When I first bought in, the dividend was $0.60. That's a copacetic trade-off in my opinion: Keep raising your dividend, and I'll keep giving you the time you need to get back on the growth track.
Mr. Eisner, you can do it
Come on, Mr. Eisner. You know you've got the means to do it. Disney produced over $1.25 billion of net income last year and had cash and cash equivalents of $1.5 billion at the end of its fiscal reporting period; it paid about $430 million in dividends. About the same as the year before. And the year before that. To boot, no common stock was repurchased in 2003. Or the year before. It's about as acceptable as a sequel to Gigli.
Granted, the company still has one or two mountains of debt to scale back, and earnings aren't necessarily robust. Yet I proffer that if the cash flow cannot be utilized toward investments that will generate a high return for the shareholder, and if capital expenditures continue to be cut, then in addition to debt repayment, the debt to the patient shareholder must be respected with at least a token penny increase each year. If even that is too much for the Mickster, then how about a return to quarterly checks? Don't tell me they saved just so much capital investment by paying annually. Please.
Of course, the big question out there is this: Why don't you just sell? I've queried myself in a similar manner many times. Since this is one of my long-term plays and not a trade, I'm staying put for now; I don't feel like selling and then possibly making a second mistake, and I think the brand value in this case is still quite compelling. But I don't have any pressing plans to add to the position right now; on the other hand, I will add in the near future to the company that markets the crimson cans of soda.
Final words
Some advice to Michael Eisner: Even though the takeover bid by Comcast (NASDAQ:CMCSA) failed, don't be surprised if others eventually materialize. If you want to remain Lord of the Mouse, focus on the dividend. And to Roy Disney: If you want to succeed in your goal, focus on the dividend. In the end, it's the only real thing in this paper-trading world of ours.
Steven Mallas means no offense to Mr. Eisner, but darn it all, he wants a bigger dividend for his Disney shares. He likes the dividend he gets with his Coca-Cola shares. The Motley Fool is investors writing for investors.
