If you're a long-term Disney (NYSE:DIS) shareholder, you have to love the performance of CEO Bob Iger, who has been at the helm for nearly a decade (since March 13, 2005, to be exact). Disney's stock is up 233% over five years, including a 33% spike in the last year, while the broader S&P 500 index has risen by 88% and 14% during those respective periods.
But things weren't always that good for Disney shareholders. After a highly publicized spat with Walt Disney's nephew Roy Disney, then-CEO Michael Eisner was unceremoniously stripped of his board chairmanship in 2004; Eisner left the company a year later.
At the time, Roy Disney's prescriptions for earnings performance were to look into breaking up the company's theme parks, Disney stores, ABC, and ESPN. Fortunately for shareholders, Iger didn't take that advice. Disney's conglomerate structure has been a source of strength to monetize its content library. Furthermore, losing ESPN would have made Disney an inherently less valuable company due to the network's tremendous growth over the last decade.
Yet, while Iger has done a lot right, Disney could still make a small change to improve demand with income-focused shareholders and broaden its investor base: pay dividends quarterly rather than annually.
You're not a hand-to-mouth business, Disney
On the surface, Disney's annual dividend payout would be understandable for the Disney of yesteryear. Dividend policy among companies varies, but is designed to balance the needs of income-based shareholders with those of other stakeholders -- bondholders, employees, and growth investors who want management to invest in the business.
The initial question for managers in this context is whether the company will have the money to pay the dividend. Disney is a conglomerate now, no longer reliant on the seasonal and cyclical businesses of its theme parks and movie studio.
Last fiscal year, 56% of its operating income came from the stable media networks business that includes ESPN and ABC -- the very businesses Roy Disney wanted to divest. Matter of fact, the company actually changed its dividend policy to pay annually in 1999 after issuing dividends quarterly since 1962.
As of its last annual report, Disney reported $3.4 billion in cash and cash equivalents; it produced free cash flow (cash from operations minus capital expenditures) of $6.5 billion last year and paid out $1.5 billion in total dividends. It should stop acting like a hand-to-mouth business and go back to paying dividends quarterly.
The reason for the annual dividend isn't operational
Unfortunately, the reason for Disney's annual dividend isn't cyclicality but costs. When Disney changed its policy in 1999, the company blamed the cost of mailing checks as the reason for the change. At that time, Disney paid an annual dividend of roughly $0.21 per share, so a quarterly check of $0.0525 (five and a quarter cents) per share may not have been worth the mailing costs.
However, after years of issuing paper stock certificates, Disney in 2013 joined other companies in issuing new shares in electronic form only to further cut costs. While there's presumably still a good deal of paper certificates out there, that number should fall as investors grow up and cash in the certificates, lose certificates, or decide the certificate is best held by a brokerage.
Considering Disney now issues its shares in electronic form only, it should use those newfound savings to pay dividends quarterly like most large-cap companies. By doing so, Disney would become more attractive to income-hungry retirees who understand that receiving dividend checks quarterly is preferable to a lump sum at the end of the year, especially now that Disney is becoming more of an income play. Although the dividend yield is roughly 1%, the company has increased its annual payout 13.6% per year since 2007, lifting the dividend from $0.47 per share to its current $1.15 in the process.
In the end, all factors equal, receiving your money on an accelerated quarterly pace instead of a lump sum at the end of the year is preferable. Even more so if you are in a dividend reinvestment program.
It has been a great decade for Disney investors with Iger at the helm, but I couldn't think of a more shareholder-friendly way to thank investors for his 10th anniversary. Disney should rethink its dividend payout policy; the benefits to many shareholders are worth more than the incremental costs.