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Summary

  • Disney has a market capitalization of $143 billion and a dividend yield of 1.0%.
  • The MyMagic+ experiment in crowd control is driving enormous efficiencies at the park by allowing for higher occupancy during busy periods.
  • The first half of the current fiscal year shows a dividend coverage ratio of 3.2x.

The scope of this article will look at the financial health of Disney (NYSE:DIS), and the ability to continue to pay the dividend. While investors see the current yield of 1.0% as possibly unattractive, the continued growth of the company, the powerful business model and the ability to raise the dividend mandates that dividend growth investors give this stock another look.

How Safe Is The Dividend?

Cash flow summary ($ in millions)

Six Months Ended 3/29/14

Six Months Ended 3/30/13

Cash from operations

$3.7

$3.3

Capex

($1.3)

($1.1)

Acquisition of Lucasfilm*

0

($2.3)

Dividends

($1.5)

($1.3)

Repurchases of common stock

($3.3)

($1.9)

The cash balance at 3/29/14 was $4.1 billion and at 3/30/13 was $4.0 billion.

For the most recent six months, Disney generated $2.4 billion in adjusted free cash flow, or cash from operations minus capex. To calculate the dividend coverage ratio, we must adjust for the annual dividend payment of $1.5 billion. The dividend coverage ratio is the free cash flow over 1/2 of the dividend (to adjust for the annual payment), or 3.2x.

For more comparisons on other large cap dividend coverage ratios, see this article on Starbucks. Please note that Starbucks had a dividend coverage ratio of 3.3x for the most recent six months of operations, and I concluded that this dividend would be raised in the next couple of months.

Cash Conversion Cycle - Evidence Of A Powerful Business Model

In a recent series of articles, I've looked at the financial health of various companies (SBUX, AMZN, IBM) by analyzing the cash conversion cycle. Given the large amounts of receivables listed as a current asset on the Disney balance sheet, let's look at how they are performing:

Two Quarters ending 3/29/14

FYE 9/28/13

Amounts in Millions of $

$23,958

$45,041

Revenues

$7,588

$6,967

A/R

57.8

56.5

(A) Days receivables {(Receivables/Sales)*365 days for full year or 182.5 for 1/2 year}

Two Quarters ending 3/29/14

FYE 9/28/13

$18,312

$35,591

Costs and expenses

$1,343

$1,487

Inventory

13.4

15.2

(B) Days inventory {(Inventory/Cost of Sales)*365 days for full year or 182.5 for 1/2 year}}

$18,312

$35,591

Costs and expenses

$6,581

$6,803

Accounts payable and other accruals

65.6

69.8

(C) Payable Days {(Payables/Cost of Sales)*365 days for full year or 182.5 for 1/2 year}}

5.6

1.9

Cash conversion cycle {a+b-c}

The cash conversion cycle is the amount of time between a company spending cash and receiving cash per each sale. It is a measure of efficiency and how long cash is tied up in working capital. The CCC is a great way to analyze the efficiency of the organization in managing cash to generate more sales.

In FY 2013, DIS held inventory for 15 days plus 57 days to collect receivables or 72 days in total. DIS pays accounts payable in 70 days, thus achieving an incredible 2 day cash conversion cycle.

Taking longer to pay bills and invoices means Disney gets to hold on to more of their supplier's cash, effectively borrowing it from suppliers. By sitting on a supplier invoice for over 2 months, Disney has an incredible source of cash when multiplied over $45 billion in annual sales.

For Disney, accounts payable and other accruals are an unencumbered source of value, and it comes without any interest costs. Disney can dictate terms to suppliers, and then invest the float in high return projects such as the MyMagic+ system now at Disney Parks.

MyMagic+: A $1 Billion Experiment In Crowd Control And Operational Efficiency

MyMagic+ is a reservation and ride planning system that allows for bookings months in advance on a website or smartphone app. Bracelets called MagicBands, which link electronically to an encrypted database of visitor information, serve as admission tickets, hotel keys, and credit or debit cards; a tap against a sensor pays for food or trinkets. The bands have RFID chips.

Intelligence collected using the bands coupled with what visitors input into the related My Disney Experience app and website-all voluntary-help Disney determine when to add staff at rides, what restaurants should serve, which souvenirs should be stocked, and how many employees in costume are necessary. Data about customer preferences could be used to text message alerts of restaurant menu changes or sudden openings at the Twilight Zone Tower of Terror.

The company has seen other efficiencies. Robert Iger told analysts in February 2014 that the new system helped the Magic Kingdom park accommodate 3,000 additional daily guests during the Christmas holiday season by reducing congestion around the most popular attractions.

Conclusion

I conclude that the DIS dividend is safe for 2014 and into 2015, primarily due to the high dividend coverage ratio and the continued ability to increase prices at ESPN and the theme parks.

Given the strong growth of Disney in FYE 9/28/13 and the competitive advantage in converting sales into cash, I will Accumulate this stock on any weakness.

This article does not describe the current drivers of the Disney business, which are critical to valuing the stock. These issues include attendance at the Parks, the commercial success of the Marvel business, and the performance of the ESPN business. The company's ESPN consistently earns the highest fees per subscriber of any cable channel. Complaints from rival media companies and cable-system operators about the sports network's fees have done little to clamp down on those fees, which can account for as much as one-quarter of content cost per subscriber.

The above article is an opinion, and not investment counsel.

Source: Disney Has Room To Raise The Dividend