With a modest dividend yield of less than 1%, Disney (NYSE:DIS) is not typically considered a top dividend stock. But investing is about the future, and Disney will probably raise its dividend substantially over the coming years. Let's take a look at Disney and three main reasons it deserves some serious consideration from smart dividend investors.
A unique business
The first and most important aspect to consider when analyzing a dividend stock is the company's fundamental soundness and competitive strength. Dividends don't come out of thin air; a business needs to be able to produce sustainable and growing cash flows if it's going to reward investors with increasing dividends over time.
The entertainment industry can be particularly cyclical since discretionary spending tends to fluctuate sensitively with the ups and downs of the economy. However, Disney is no average industry player.
The House of Mouse is an undisputed heavyweight champion benefiting from truly unique assets. Disney is an inter-generational company that's built a long-lasting emotional bond with parents and kids of different ages all over the world, and its invaluable portfolio of brands and fictional characters sets it apart from the competition by a wide distance.
ESPN is a major cash cow generating most of the company's operating earnings in the networks division, and it would be enormously difficult for competitors to replicate the expensive long-term contracts ESPN has signed with major sports leagues and associations in different disciplines around the planet.
Disney has the ability to monetize its characters and franchises across multiple platforms: movies, shows, home videos, theme parks, merchandising, video games, etc. This provides a lot of leverage when it comes to making money from its properties, and it's an unparalleled advantage in the media and entertainment industry.
The magic factory is firing on all cylinders
Management knows how to translate the company's competitive strengths into growing cash flows and earnings for investors, its financial performance has been remarkably solid over the last several years, and there is no slowdown in sight, judging by the latest financial figures.
Both sales and earnings during the last quarter came in above Wall Street's expectations; Disney delivered a 21% increase in operating income during the period, while earnings per share jumped 27% versus the same quarter in the prior year. The studio division was the star of the show; sales grew 18%, and segment operating income increased by a jaw-dropping 135%.
During Disney's fiscal 2014 year -- ended in September -- 11 franchise movies produced over $1 billion each in retail sales, and half of them originated in Disney's studios. The list includes widely successful names such as "Guardians of the Galaxy," "Maleficent," "Captain America 2," and "Frozen," which became the most successful animated movie of all time and appears to have tremendous franchise potential.
The pipeline is full of new and promising content to be released over the coming years; Disney has recently announced the name of the next Star Wars movie -- "The Force Awakens" -- which is scheduled to be released on December 18 of next year.
The stage is set for dividend growth
Disney has raised its dividends in every year from 2004 to 2013, and while a decade of consistent dividend increases is nothing to sneeze at, this track record is not too impressive when compared against top dividend stocks like Procter & Gamble or Coca-Cola -- companies that have raised their dividends for more than 50 consecutive years.
But the past is only prologue to the future. Disney produced nearly $6.5 billion in free cash flows during the last fiscal year, while dividends accounted for only $1.5 billion, or 23%, of free cash flows. The company repurchased stock for $6.5 billion, so management is giving preference to share buybacks over dividends. Still, the business is generating tons of free cash flow, which could mean steady distributions for shareholders.
As long as management keeps leading the company in the right direction and capitalizing on its competitive strengths, operating cash flows should continue increasing over time. Capital reinvestment needs will probably grow at a slower rate than operating cash flows as the business matures, which bodes well in terms of future free cash flow generation.
Considering its extraordinary fundamental quality, rock-solid financial performance, and generous capital distribution policy, everything seems to indicate Disney will continue increasing its dividends for years, and even decades, to come.