At Allen & Co.'s media-mogul-studded annual conference in Sun Valley, Idaho, beleagueredWalt Disney
Mallas argued that Disney's paltry $0.21 annual dividend (which amounts to a dividend yield of less than 1%), unchanged since 1999, contributed to great dissatisfaction for many shareholders. He also took issue with Disney's practice of paying the sum once a year instead of breaking it up into quarterly chunks. Those quarterly chunks can make dividend reinvestment more effective, offering four chances to get additional shares at different price points.
Apparently a stock buyback plan is also being discussed by bigwigs at the Mouse House. To be sure, neither dividend increases nor stock buybacks are absolutely the best things companies can do. Sometimes they make a lot of sense, and sometimes they don't.
When a company generates earnings, there are four main things it can do with that profit. It can pay shareholders a dividend, pay down its debt, buy back shares of its company stock, or reinvest in operations. Profits might be used to acquire another company. Or a new factory might be built, upping the firm's output and sales. The bottom line is that the company should aim to get the biggest bang for its bucks.
If the firm's stock is overvalued (perhaps trading with a price-to-earnings ratio near a record high), spending money to buy back shares is destructive. If it's significantly undervalued, then many more shares can be had for the same amount of money, and by reducing the number of shares outstanding, shareholders benefit. They will each own a bigger piece of the pie.
Dividends, too, reward shareholders, though they come with tax consequences. If a firm can come up with more effective ways to spend its money, shareholders can profit without as many tax issues. One danger in setting a dividend payout rate too high is that it might not be sustainable -- and no firm ever wants to have to decrease its dividend, as that would be embarrassing.
Four months ago, 45% of Disney's shareholders expressed dissatisfaction with Eisner. A dividend hike and stock buyback may be two attempts to appease these owners. Both options make some sense. Disney shares don't appear wildly overvalued -- they're trading at a P/E ratio below the average levels over the past eight or so years. And with Disney's debt having been reduced, more funds are freed up for dividends -- though we still have no idea how big the hike may be.
The annual Sun Valley shindig draws many media moguls and permits much networking (and even deal-making) between them. Attendees include TheWashingtonPost's
Stay tuned to see whether any interesting developments result. And check out a free trial of our Motley Fool Stock Advisor newsletter to see which media companies Fool co-founders David and Tom Gardner have recommended.
L ongtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway.