If you are an investor in Disney (NYSE:DIS) then you've probably heard that earlier this week they hiked up their annual dividend from 60 cents to 75 cents and shares rose accordingly. Unfortunately, the price failed to break the $50 mark and the stock remains in a state of limbo that began in July. Since then, shares have risen as high as $53 and dipped as low as $47, but there has not been much price appreciation, despite plenty of meaningful news. This article will attempt to address a number of factors that should help Disney in getting over the hurdle and why the stock could easily rise 10% in the next year.
Again, Disney just raised the dividend by 15 cents and for the sake of extremely easy math: at a price of $50 this would yield 1.5%. This is really nothing special. Investors looking to pick up dividend plays have much better options, but with the looming risk of a dividend tax rate increase there may be a shift to slightly riskier stocks. In reality, if the tax rate does go up you'll be getting close to the same amount from Disney. Also worth noting is the rise in dividend payments over the last few years. Investors may have been turned off by the 15 cent raise after the 50% rise last year from 40 to 60 cents. The year before that was at 35 cents. So over the course of three years, Disney's dividend has more than doubled from 35 to 75 cents.
After this summer it would be tough to say that Disney's acquisition of Marvel has been anything other than awesome. I wrote this article just after The Avengers had come out and said that Disney was still a buy at $45. In full disclosure, I also said that Disney was a buy in this article from 14 months ago when the stock was at $32 and I purchased more shares around that time. Back to Marvel; all of the major characters from The Avengers have new movies that will be coming out in the next few years. Iron Man 3 is probably the most prominent and will be released in May, followed by Captain America: The Winter Soldier, Thor: The Dark World, Avengers 2, and probably an Edward Norton-less Hulk at some point. These movies are like printing money and allow for risky productions that could bomb, like John Carter. In the interest of a shareholder knowing what he is investing in, I tried to watch this last week and got about half an hour in before realizing I will never get that half hour back. But book adaptations have an inherent risk of being awful, and maybe they will be able to reuse these Martians in Star Wars. Speaking of which…
I live on the coast of central New Jersey, so the Lucasfilm announcement was not really huge news at the time, because there was no way of accessing said news, but obviously this is a huge deal. Oddly enough, this announcement came not long after the renovated Star Tours ride in Disney World was completed (not as huge a deal). No matter how much money gets sunk into Episode VII, it's tough to imagine a way in which this film does not do well at the box office. The Dark Knight: Rises was not as good as The Dark Knight and still made $200 million more than its budget, and that was just domestically. So can Star Wars justify a $4 billion investment? Probably. Star Wars has an incredibly large fan base: basically anyone that was between the ages of 10 and 35 in 1980 and again in 2000. And on top of that is the fact that Star Wars is the best merchandiser in the entertainment world, as evidenced by the newest version of Angry Birds (note: the Hoth levels were just released).
Clearly, when news like this comes out and it is not followed by a spike in price it makes you worry. There could be a fear that short-term issues like the fiscal cliff are more controlling than long-term purchases. Either way, the Lucasfilm buy could create an entry point for investors looking to get in on Disney. Initially, there will be some holes in the balance sheet that could drop the price down. Of course, this is sort of irrational because any informed investor would know where the money is going, but there are also funds that can only have money in stocks that meet expressly defined metrics. My point is that an unjustified drop on earnings could present a nice value play.
There has been a lot of recent discussion regarding the amount that cable subscribers are charged for ESPN. Right now it is around $5 per subscriber and some had proposed that the channel and its progeny would be dropped off basic packages. These rumors appear to be unfounded. We are a nation that escapes our problems (like the fiscal cliff) through sports. I am actually writing this prior to watching my alma mater, Rutgers, play Louisville on the one day of the year that they are allowed to play on a national channel.
Personally, I could live without ESPN and probably haven't watched Sports Center in the last decade (I'm in my mid-twenties). I am a hockey fan and last week's Bristolmetrics show that the NHL was mentioned exactly 0 times in 326 minutes of airtime, while being in the midst of groundbreaking sports labor law negotiations. All kidding aside, ESPN does well because it caters to what the average American wants to see and that is why I feel it will not be dropped from packages (and this is not discounting the growth opportunities that exist outside of America). They have become synonymous with sports and it's foolish to think that NBC Sports is an actual competitor. NBC just inked a deal to be the exclusive provider of English Premier League games for $250 million over three years. There is a good chance that many readers do not know what the EPL is, which is proof that ESPN will not lose much in not being able to show a game or two before most are awake on Saturday and Sunday mornings. With this deal, NBC has locked down soccer, hockey and cycling. I do not have the numbers, but I would bet that 16 weeks of Monday Night Football has a bigger draw than all three of those combined for the year. In sum, I think that ESPN can continue paying large sums for broadcasting rights and recoup that amount from advertisers and cable subscribers. With the still largely untapped online media market available, it is safe to say that ESPN is stable and growing.
Initially I was not going to include this as a subsection, but I came across this article during my bankruptcy law class today. The first ship listed on CNN's list of best new cruise ships is the Disney Fantasy, and it was not that long ago that I was writing about the then-new Disney Dream. A pretty obvious fact about cruise ships is that they take a long time to make. The Fantasy and the Dream are essentially the same thing, ordered at the same time in 2007 from Meyer Werft, both housing 4,000 passengers. Since they were both bought pre-recession, it will be interesting to see what kind of profits these ships are making. Like a restaurant, I wouldn't give too much credence to first and second year numbers, but there are rumors that Meyer Werft has been commissioned to build two more ships which shows that Disney has faith in their profitability.
There is really no argument that Disney's parks are second to none and they are the building block of what the company has grown to become. The looming fiscal cliff could have substantial effects on the economy, but the parks came out the recession unscathed and it is reasonable to believe that they will persevere again. A tenet of value investing is picking up good companies when they are at depressed prices. I mentioned that the Lucasfilm deal could knock down Disney's stock price, which has had trouble breaking the $50 mark anyway. I also mentioned that Disney could give an investor 10% over the next year. The stock normally trades between 15 to 16 times earnings which are slated to be between $3.40 and $3.50 for 2013. This fact, coupled with the currently, slightly greater than 1.5% dividend could easily turn 10% in the next 12 months, while giving the investor a stake in a company that they should feel assured about holding for the long term.
Disclosure: I am long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.