Getting the month started off right! I suppose cash, when I have it, just burns a hole in my pocket. Maybe I need new pockets? Or maybe I just need more cash?
Either way, I didn’t wait long to put some capital to work this month. I’m actually a bit light on capital right now, which means this may be my only stock purchase for December. I might have enough for a smaller buy later down the line, but I’m also okay if this is my only activity this month.
I purchased 15 shares of Walt Disney Co. (DIS, Financial) on 12/4/14 for $93.35 per share.
Overview
Walt Disney Co., together with its subsidiaries, is a diversified global media conglomerate.
They operate through five segments: Media Networks (43% of fiscal year 2014 revenue); Parks and Resorts (31%); Studio Entertainment (15%); Consumer Products (8%); and Interactive (3%).
Disney owns a number of different, but complimentary, businesses in media and entertainment. Perhaps most well known, they own and operate the Walt Disney World Resort in Florida and the Disneyland Resort in California. They also wholly own, have ownership interests, and/or collect royalties from a number of related parks, cruise lines, and resorts across the world.
But the company is much more than that. They have rather substantial assets in media broadcasting, including the ABC broadcast network and eight television stations. In addition, they own cable assets in ABC Family, Disney Channels, a 50% stake in A&E Television Networks, and an 80% stake in ESPN.
Studio entertainment includes live-action and animated motion pictures, direct-to-video content, musical recordings, and live stage plays. Distribution of this content is primarily through the Walt Disney Pictures, Pixar, Marvel, Touchstone, and LucasFilm brands.
Of course, they also work with publishers, licensees, and retailers throughout the world to manufacture, market, and license consumer goods based on their intellectual property.
Fundamentals
So Disney is a well-known company. But perhaps what isn’t as known is actually how they perform as a company. It’s easy to assume they print money if you’ve ever been to one of their parks or stood in line waiting for one of their movies, but let’s see exactly how all of that consumer interest translates into top line, bottom line, and dividend growth.
Their fiscal year ends September 30.
Revenue grew from $31.994 billion in FY 2005 to $48.813 billion at the end of FY 2014. That’s a compound annual growth rate of 4.81% over that time frame. The top-line growth wasn’t as impressive as one might suspect, but it wasn’t lumpy. Other than a drop in 2009, it’s almost as if the Great Recession didn’t even occur.
Earnings per share improved from $1.24 to $4.26 during this period. That’s a CAGR of 14.7%. That’s a bit more like it, and serves to show just how much and how fast this company is indeed growing.
S&P Capital IQ predicts EPS will grow at a compound annual rate of 14% over the next three years, in line with their recent historical average.
Now, DIS isn’t a prototypical dividend growth stock because they held their dividend static throughout the Great Recession. Furthermore, a low yield and annual payout just adds to its undesirability for some. I regret letting these qualities prevent me from investing much sooner, but I’m rectifying that now.
The company has been actively and aggressively increasing the dividend for the past five consecutive years, with the most recent dividend increase of 33.8% announced just two days ago. Over the past five years, the dividend has increased at a compound annual rate of 30.2%.
The stock currently yields 1.23% here, which does leave a bit to be desired.
However, a very low payout ratio of just 27% means the odds are very good that the dividend will continue increasing at a rather generous rate. Combining that low payout ratio with a high growth rate in the underlying business portends plenty of large dividend raises for the foreseeable future.
The company did have to issue shares for some acquisitions over the last decade, notably with the Marvel deal. However, they’ve been reducing their share count since 2011 – down from a bit over 1.9 billion shares to just over 1.7 billion shares now. They have an ongoing open repurchase authorization for up to 400 million shares with no expiration date, of which a substantial portion have already been repurchased leading to the reduced share count since the 2011 authorization began.
DIS maintains a superb balance sheet. The long-term debt/equity ratio is 0.28, while the interest coverage ratio is 42.65. These numbers are especially impressive considering the acquisition spree the company has been on over the last decade – long-term debt has barely budged over the last 10 years, even while the company has expanded immensely.
Profitability is sound. Net margin has averaged 12.92% over the last five years, while return on equity has averaged 13.93%. Both of these metrics have been improving markedly over the last few years.
Qualitative Aspects
Disney sports one of the widest economic moats out there, in my view. They have a collection of unique, renowned, and sought-after characters across their parks, cruise ships, broadcast networks, cable networks, movies, and products that would be nearly impossible to replicate by a competitor. And the staying power of their classic characters should be well understood by now, with Mickey Mouse dating back to 1928.
In addition, they’ve been heavily bolstering their core business around new and exciting brands and characters. Incredibly intelligent and successful acquisitions like Pixar, Marvel, and Lucasfilm over the last decade has led to a string of successful movies like Toy Story 3, Frozen, and The Avengers, along with respective licensing and products. Furthermore, upcoming projects like The Avengers: Age of Ultron andStar Wars: The Force Awakens have a ton of potential. These acquisitions help Disney cross the bridge from childhood to adulthood, which allows them to scale their consumer base dramatically. And every new successful project allows Disney to reap rewards for years, or even potentially forever.
I also find Disney’s willingness to go beyond traditional media refreshing and smart. For instance, they own a 33% stake in Hulu. And a recent acquisition of Maker Studios, a digital network on YouTube, gives them access to online content.
Their core broadcast and cable media offerings are among the strongest in their respective categories. ESPN is the crown jewel here, with the highest subscriber fees of any cable network. Exclusive long-term sports broadcasting rights, like Monday Night Football, keeps ESPN as the dominant sports content provider.
Risks
Disney’s risks include broader economic slowdowns, which could limit demand for their theme parks, cruise ships, and resorts. In addition, cable subscription cancellations would reduce demand for and the fees driven from their cable networks. They also have to constantly be able to adapt their content to current consumer demand and interest.
Valuation
Shares are offered at a P/E ratio of 21.91. That’s a bit higher than I’m usually willing to pay for a business, but DIS appears to be particularly high in quality. This ratio does compare unfavorably to their five-year average of 17.2, however. Although, some of their more notable acquisitions have been more recent.
I valued shares using a dividend discount model analysis with a 10% discount rate and a two-stage growth rate: 20% dividend growth for years 1-10 and a 7% terminal growth rate. I used a two-stage model due to DIS’s low yield. The growth rates I used appear to be reasonable to me based on Disney’s historical results, low payout ratio, and penchant for rewarding shareholders with generous dividend increases now that the financial crisis is behind us. The DDM analysis gives me a fair value of $117.06.
I think an argument could be made that DIS is at least fairly valued here, if not offering a solid margin of safety. Considering the fantastic business model, I’m willing to even go so far as to pay a premium for shares. But I honestly don’t feel shares are priced at a premium right now, which is a solid opportunity, considering where the broader market is at.
Conclusion
Disney is one of the best, if not the best, media production and entertainment company available for investors, in my humble opinion. Their characters span from Mickey Mouse to Iron Man to Darth Vader. I’ll be honest and admit that I’ve been somewhat influenced by Warren Buffet here. His longstanding desire to own assets in media is well-documented, and re-reading his biography shows the lengths he went to to invest in newspapers and broadcast media, leading to longstanding friendships with luminaries like Katharine Graham and Tom Murphy. And even recent moves within the Berkshire Hathaway Inc. (BRK.B)portfolio shows a continued desire to invest in media and content delivery. Until this purchase, I lacked any kind of investment in a major content production company, let alone a company of the quality that Disney offers.
I regret not investing in Disney earlier. I kept passing it up due to its low yield, annual payout schedule, and perceived lack of clear-cut value. Furthermore, its stock has been almost straight up since late 2011. But I decided to initiate a position here at what seems like a solid value for the long term. I regret not buying Visa Inc. (V, Financial) back in the $90s when it featured a similar yield and valuation. I decided not to make the same mistake here with Disney. And the dividend announcement two days ago was the impetus I needed to put some capital to work here.
I’m going to include a couple of other valuation opinions below, as I use these to concentrate my reasonable valuation estimate:
Morningstar rates DIS as a 3/5 star value, with a fair value estimate of $95.00.
S&P Capital IQ rates DIS as a 4/5 star “buy”, with a fair value calculation of $100.60.
This purchase adds $17.25 to my annual dividend income, based on the current $1.15 annual dividend.
I’ll update my Freedom Fund in early January to reflect this recent purchase.
Full Disclosure: Long DIS and V.
What are your thoughts? Are you a fan or shareholder of DIS? Why or why not?
Thanks for reading.
