Today I take a look at Dow 30 component stock Walt Disney (DIS). Disney is a phenomenal dividend payer and grower. However, the stock is speculatively priced at today’s price of $47.07 and their balance sheet is weak. To see how I came to these conclusions read on.
Walt Disney (DIS)
Price: $47.07
Shares: 1.79 billion
Market capitalization: $84.15 billion
What does the company do: Disney owns the rights to some of the most famous characters ever created, including Mickey Mouse and Winnie the Pooh. These characters and others are featured in several theme parks Disney owns or licenses around the world. Disney makes live-action and animated films under several labels and owns ABC, Disney Channel, and ESPN. Disney also owns a 42.5% stake in A&E, The History Channel, and Lifetime Networks. The company generates about 25% of its sales from outside the United States.
Morningstar’s take: Disney owns a collection of valuable assets, but its media networks, which generate more than half of the company's operating profit, are the backbone of this conglomerate.
Bonds: $11.0 billion outstanding
Times interest earned: 11 times (DIS earned $4.807 billion as of 3Q 2011 / $435 million interest expense). That far exceeds Benjamin Graham’s recommendation of earning at least five times interest expenses. Disney’s bonds do not threaten the dividend at all.
Preferred stock: none.
DIVIDEND RECORD: Walt Disney Co. has paid a dividend since at least 1987. Disney paid a $0.02 annual dividend in 1987 and it has grown that dividend to $0.60 annually today. That is 2,900% straight-line dividend growth over 25 years or 116% annual straight-line dividend growth per year. Disney has been a phenomenal dividend grower. Note: they paid a quarterly dividend from 1987 until 1997. In 1998 they switched to an annual dividend.
Dividend: $0.60 annual dividend paid late in the year
Dividend yield: 1.27% ($0.60 / $47.07 share price) Disney will become a 6% high dividend stock at $10.00
Dividend payout: 21.5% using the Google Finance reported EPS of $2.79 –OR- 27.7% using the average adjusted earning power of $2.16
I’d like to see Disney pay out at least 50% of their average adjusted earnings in the form of dividends. That would work out to an annual dividend of $1.08. Even better would be a quarterly dividend of $0.27 per share instead of the annual dividend.
EARNING POWER: $2.16 per share at 1.79 billion shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
Date | EPS | Net Income | Shares | Adjusted EPS |
9/2005 | $1.22 | $2,533 M | 2,089 M | $1.41 |
9/2006 | $1.64 | $3,374 M | 2,076 M | $1.88 |
9/2007 | $2.25 | $4,687 M | 2,092 M | $2.62 |
9/2008 | $2.28 | $4,427 M | 1,948 M | $2.47 |
9/2009 | $1.76 | $3,307 M | 1,875 M | $1.85 |
9/2010 | $2.03 | $3,963 M | 1,948 M | $2.21 |
9/2011 | $2.52 | $4,807 M | 1,909 M | $2.69 |
Seven year average adjusted earnings per share is $2.16
Consider contrarian buying below $17.28 (8 times average adjusted EPS)
Consider value buying below $25.92 (12 times average adjusted EPS)
Consider speculative selling above $43.20 (20 times average adjusted EPS)
Walt Disney Co. (DIS) is currently trading at 21.8 times average adjusted EPS. This is speculatively priced; consider shorting.
BALANCE SHEET – Disney has a weak balance sheet. The price to book value ratios and other measures of financial strength are weak.
Book value per share: $21.26 ($38.049 B equity / 1.79 B shares)
Price to book value ratio: 2.2 (under 1.0 is good) ($47.07 share price / $21.26 BV) Investors are paying $2.20 for each $1.00 in book value.
Tangible book value per share: $4.35 (equity - $25.113 B goodwill - $5.142 B intangibles)
Price to tangible book value: 10.8 ($47.07 share price / $4.35 TBV) 40.2% of Walt Disney’s assets are in intangibles which explains why the P/TBV increased so much.
Current ratio: 1.14 latest quarter (over 2.0 is good) ($14.537 B current assets / $12.724 B current liabilities)
Quick ratio: 0.29 latest quarter (over 1.0 is good) ($3.731 B cash and equivalent / $12.724 B current liabilities)
Debt to equity ratio: 0.33 (lower is better)
Percentage of total assets in plant, property, and equipment: 27.7% (the higher the better) Disney has massive intangible assets at 40.2% of total assets, current assets were 19.52%, and other long term assets were 12.76%
Working capital trend (w/ 3 year moving average trendline): Up slightly in the long run, but I don’t like the several year stint of negative working capital.
CONCLUSION – Walt Disney Co. bottomed near $15.00 in early 2009 near the height of the financial crisis. That price represented an extreme contrarian buying opportunity at 6.9 times average adjusted earnings. The stock price has tripled since that time and has entered speculative price territory at 21.8 times average adjusted earnings. I would consider shorting Disney above $43.20. A return of the worldwide recession will hurt Disney’s theme park revenues and media sales. Disney’s dividend yield is less than the S&P 500 average of 2.2%. I wish the board of directors would increase the payout from 27% to 50% or more. A high payout would increase yield. Disney’s real weakness is its balance sheet. The price to tangible book value is horrible. Also, Disney has weak financial strength in the current ratio and quick ratio metrics. I would stay away from Disney until the stock drops back to the $25 to $17 dollar range.
DISCLOSURE – I don’t own Walt Disney Co. (DIS).
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