In an unusual move, activist investor Daniel Loeb (Trades, Portfolio) is asking The Walt Disney Co. (DIS, Financial) to halt its dividend in favor of investing in new content for its subscription-based streaming service.
The guru, who is the head of New York-based hedge fund Third Point Management, sent a letter to Disney CEO Robert Chapek on Wednesday, Oct. 7 encouraging him to suspend the company's $3 billion annual dividend and instead invest that capital in Disney+ as he feels it would create more value for shareholders.
While activists typically want companies to return money to investors, Loeb argued that Disney's shares can trade at a similar level to Netflix Inc. (NFLX, Financial) if the company ditches its semi-annual payments and instead uses those funds to break out of the traditional media space by providing a best-in-class platform versus other streaming services.
While the media giant has already been able to attract customers to Disney+ with a large library of content, including the Marvel franchise and "Star Wars" films, it has also appealed to consumers by providing the hit Broadway musical "Hamilton" and premiering the new live-action version of "Mulan" on its platform. It also saw success when it first launched with the new "Star Wars" spinoff show, "The Mandalorian." Last year, Disney said it expected to spend about $1 billion on original content for its streaming service in 2020 and just $2.5 billion by 2024. As a result of the Covid-19 pandemic, however, production for some of that content has been delayed.
"By reallocating a dividend of a few dollars per share, Disney could more than double its Disney+ original content budget," Loeb, who is currently one of the company's largest shareholders, wrote. "The ability to drive subscriber growth, reduce churn, and increase pricing present the opportunity to create tens of billions of dollars in incremental value for Disney shareholders in short order, and hundreds of billions once the platform reaches larger scale."
As more and more legacy media companies are transitioning away from traditional box office movies and cable TV toward subscription streaming services, they will really need to differentiate themselves in order to effectively compete. While Netflix and Amazon (AMZN, Financial) have a significant head start in the space, Loeb said Disney has a financial advantage over players like AT&T (T, Financial), Discovery (DISC, Financial), ViacomCBS (VIAC, Financial), Comcast (CMCSA, Financial) and Fox (FOX, Financial).
"A more aggressive content roadmap will distinguish Disney as the only traditional U.S. media company able to thrive in a world beyond the box office and the cable TV ecosystem, alongside digital-first businesses like Netflix and Amazon," Loeb wrote.
He also pointed to the fact that since its launch in November 2019, Disney+ has already gained more than 60 million subscribers, which is way ahead of the estimates the Burbank, California-based company provided last year. At that time, it was projecting it would have 60 million to 90 million subscribers by 2024.
While such an aggressive investment strategy will likely put pressure on Disney's short-term earnings, Loeb said it will be worth it to create value in the long term.
"Lest there be a reservation about making such a trade-off and any potential shareholder concerns, we highlight an observation from Warren Buffett (Trades, Portfolio): 'companies get the shareholders they deserve,'" Loeb wrote. "Disney deserves growth-minded, long-term oriented investors, and we believe that a strategy centered around using Disney's many resources to drive growth in the DTC business will further attract them. With Disney's superior tentpole franchises and production capabilities, we believe that the company can exceed the subscriber base of the industry leader, Netflix, in just a few years."
Dividend history
While Disney decided to forgo its semi-annual dividend for the first half of 2020 in May in light of the pandemic, GuruFocus data shows the company has grown its dividend at a rate of 10.4% over the past five years, and has continuously increased it since 2009.
Currently, the stock has a dividend yield of 0.72%, which is underperforming not only versus its competitors but in comparison to its history as well as it is near a 10-year low according to GuruFocus' warnings signs.
Loeb's history with Disney
After selling out of Disney in 2013, Loeb's interest in the stock was renewed in the first quarter of 2020. In a letter to shareholders, he wrote Third Point established a long position "when shares traded down on fears that closures of theme parks and movie theaters due to the coronavirus pandemic would cripple the company."
He said the slew of analysts who downgraded the stock were missing out on the "important opportunity" the pandemic provided to Disney, which was "to accelerate a plan to bring its blockbuster content directly to the consumer via streaming."
The guru held 5.5 million shares at the end of the second quarter, representing 8.42% of his equity portfolio and 0.30% of Disney's outstanding shares.
So far, GuruFocus estimates he has gained 6.77% on the investment.
Other gurus who have large positions in Disney include Philippe Laffont (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Primecap Management, Pioneer Investments (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Yacktman Asset Management (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Mairs and Power (Trades, Portfolio) and David Tepper (Trades, Portfolio).
Stock performance
With a $222.25 billion market cap, shares of Disney were trading 0.13% higher at around $123.07 on Thursday. GuruFocus data shows the stock has fallen approximately 15% year to date.
Disclosure: No positions.
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