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Summary

  • Free cash flow will likely grow by more than 10% CAGR in the next few years driven by solid EBITDA growth and relatively steady capex trend.
  • DIS can sustain a ~15% annual dividend per share growth in next 2 years with both free cash flow and earnings dividend payout ratios being stable.
  • Dividend yield on cost will reach 2% by fiscal 2019 with conservative assumptions..

Dividend of Walt Disney (NYSE:DIS) has grown by 25% CAGR since 2009 and the most recent hike came in at 15% in late 2013. Although the stock currently offers a dividend yield of just 1%, I believe yield on cost would look much better after few years due to strong dividend growth prospects. In this article, I will provide readers some perspectives on DIS' future cash flow and dividend trends.

I firstly performed free cash flow projections from fiscal 2014 to 2016 to gauge the company's capacity for continued dividend growth. My analysis was based on consensus EBITDA estimates which predict the metric to rise by 9.6% CAGR from $14.0B in fiscal 2014 to $16.8B in fiscal 2016. DIS' EBITDA to operating cash flow conversion rate trended from 73% to 81% in the past 5 years. To be fair, I used a 5-year average of 75.3% and assumed the cash conversion rate to remain flat through fiscal 2016. For capital expenditure, I used consensus estimate of $3.7B for fiscal 2014 and assumed the spending to rise modestly to $3.9B in the next 2 years. Based on the fair assumptions, free cash flow was projected to grow by 13.2% CAGR from $6.8B in fiscal 2014 to $8.8B in fiscal 2016 (see chart below).

(click to enlarge)

Since DIS pays its dividend only once in December of each fiscal year, dividend spending for fiscal 2014 will remain at $1.5B which was recently reported in Q2. Given my free cash flow forecast for the current fiscal year, free cash flow dividend payout in the year will be 22.1%, which is in line with average in past 3 fiscal years. As free cash flow CAGR was projected to be 13.2% from fiscal 2014 to 2016, DIS can grow its dividend spending by a similar rate (I modeled 13.0%) in fiscal 2014 and 2015 so as to maintain a steady free cash flow payout trend. In this case, the company's excess free cash flow will rise from $5.3B to $6.8B in each year, which can be used to fund share buybacks and other corporate plans (see chart above).

In terms of share repurchase, I used the mid-point ($7B) of management's guidance range of $6B-$7B for fiscal 2014. I then assumed the company to spend 80% of the excess free cash flow on share buybacks in next 2 years. Based on an average repurchase price of $81 in fiscal 2014 and an annual price increase of 7.5%, I estimated that Q1 average share count (I will explain why Q1 share count is used) will drop to approximately 1.67B by fiscal 2016. However,as the company incurred notable equity issuance in the past 5 years, I applied a 40% haircut to my forecasted share count reduction per year to account from potential dilution impact. As a result, I assumed the average count to decline to 1.70B by fiscal 2016 (see chart below).

(click to enlarge)

As a note, DIS' income statement records dividend per share that is paid in next fiscal year. For example, the most recent dividend of $0.86 per share was recorded in fiscal 2013 income statement but was actually paid in fiscal 2014. Hence, to arrive at $0.86, one should divided the dividend spending of $1.5B in fiscal 2014 by average share count in Q1 fiscal 2014 (the dividend was paid in December). Following the same logic, I forecasted dividends per share in fiscal 2014 and fiscal 2015 based on my dividend spending and Q1 share count projections in fiscal 2015 and fiscal 2016, respectively. As a result, dividend was projected to grow by ~15% per annum from $0.86 per share in fiscal 2013 to $1.14 per share in fiscal 2015. Compared with consensus EPS estimates, my dividend forecasts imply that earnings dividend payout ratio will remain very stable at around 25% through fiscal 2016 (see chart above)

As both free cash flow and earnings dividend payout ratios will remain flat under my forecasts and DIS has a consensus long-term EPS growth estimate of 14.2%, which is close to my dividend per share growth projection, I believe my dividend estimates are at a sustainable level. Assuming the dividend per share growth decelerates to 8% in fiscal 2016 and onwards, I estimated that yield on current cost (~$83 per share) will reach 2% by fiscal 2019.

In conclusion, DIS has the capacity to sustain a dividend per share growth at around 15% at least over the next few years. This is supported by solid EBITDA growth and relatively steady capex trend that drives strong free cash flow growth as well as management's share buyback commitment.

All charts are created by the author, and historical data used in the article and the charts is sourced from S&P Capital IQ, unless otherwise specified.

Disclosure: The author is long DIS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: The Walt Disney Co.: Expect Continued 15% Dividend Growth In Next 2 Years