Charlie Munger, the legendary investor, always advises investors to invest in cannibals in order to be successful. Cannibals are companies that keep buying back their shares on the market over time. Last month, Disney (NYSE:DIS) announced a plan to repurchase as much as $6 to $8 billion worth of its own shares, which will start in fiscal 2014. At the current trading price of $68.10 per share, Disney is worth around $121.70 billion on the market. Thus, the buyback represents around 5%-6.6% of Disney's total market value. Should investors get excited about the upcoming buyback?
Media Networks is the main source of profit
Disney makes money from four main sources: media networks, parks & resorts, studio entertainment and consumer products interactive. Its biggest business is media networks, which accounts for 46% and 67% of its total revenue and operating income, respectively. In the media networks segment, the cable networks business is the main source of profit. Cable networks contributed nearly $2.1 billion in operating income in the third quarter of fiscal 2013, which was 12% higher than its contribution in the third quarter of last year.
The strong performance in the cable networks business was mainly because of growth in ESPN and additional equity income from A&E Television Networks. Indeed, ESPN is one of Disney's most valuable assets. It has been ranked as the No. 1 network in perceived value for 13 years straight, and ranked as the most important network during the past nine years. However, Disney does not rest on past success. The company mentioned that ESPN would continue to refine its sports portfolio, expanding its original programming and innovating its programs to bring more loyal fans and drive its profitability.
A cash cow with regular share buybacks
Disney has been generating increasing free cash flow over time, which has risen from more than $1.85 billion in 2003 to nearly $4.2 billion in 2012. Interestingly, the company has been a regular purchaser of its own shares in the market, supported by the strong cash flow it generated. Year-to-date, Disney has repurchased 57 million shares for around $3.2 billion. The potential $6-$8 billion share buyback plan might require Disney to use some debt financing. However, because net debt/2014 EBITDA (earnings before interest, taxes, depreciation and amortization) will stay at only 0.91 and Disney is a cash cow, the debt incurred for this share repurchase will not negatively affect the company's capitalization.
Peers Time Warner (NYSE:TWX.DL) and Twenty-First Century Fox (NASDAQ:FOXA) are also planning to return more cash to shareholders via share repurchases. Year-to-date, Time Warner has returned as much as $2.4 billion to shareholders which includes $500 million in dividends and more than $1.8 billion in share buybacks. Going forward, Time Warner expects mid-teens year-over-year growth for the full year of 2013.
Twenty-First Century Fox, the owner of filmed entertainment, pay television and direct broadcasting, is also a cannibal. Since the beginning of July 2013, the company has repurchased around $320 million worth of its shares. Twenty-First Century Fox plans to buy back as much as $4 billion worth of its shares, which could be executed in over a year. The company is worth around $80.30 billion on the market. Thus, a $4 billion share buyback represents approximately 5% of its total market cap.
In 2014, Twenty-First Century Fox expects that its total segment EBITDA percentage growth rate will be in the single to low double-digit range. It had EBITDA of $6.26 billion in 2013. Most of the growth will come from several initiatives which include sports networks and the FXX launch.
My Foolish take
With a strong global franchise and invaluable assets, Disney could be a great investment candidate for long-term investors. Moreover, Disney could return quite a decent amount of cash to shareholders via its upcoming share repurchases in the near future. With a not-so-expensive valuation of 11.44 times EV/EBITDA, or enterprise value/earnings before interest, taxes, depreciation and amortization, Disney is quite a good long-term investment opportunity.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.