Why Disney's Dividend Hike Is Good News

| About: The Walt (DIS)

By David Berman

The fact that Walt Disney Co.(NYSE:DIS) boosted its annual dividend by 50 per cent may not excite a lot of investors: Even with the big increase, the yield is just 1.7 per cent. That’s lower than the 2.1 per cent yield on the S&P 500 – an average that includes companies that don’t even pay dividends.

However, there are at least two reasons to embrace this increase as good news. For one, as Mark Hulbert points out at MarketWatch (via Abnormal Returns), it sheds some meaningful light on the company’s level of confidence in its future. And a 50 per cent increase is a lot of confidence.

It means that the company is pretty darn sure that it will not have to cut its payout in the foreseeable future, given that dividend cuts can bring companies unwanted notoriety. As well, with Disney operating within a cyclical sector – entertainment – the increase also suggests that the company is bullish on the economy, too. That’s notable, given some of the fears about the health of the global economy right now.

But the dividend increase is also meaningful based on what it means for putting cash into the pockets of investors. The dividend yield on Disney shares is low because the stock price is high.

As Eddy Elfenbein at Crossing Wall Street noted, the dividend gains have certainly rewarded long-term investors over the years. Had you bought the shares 30 years ago, the yield on your original Disney investment would be an amazing 60 per cent, according to Mr. Elfenbein’s calculations, because of the steady increases since then.

Can investors rely on more increases ahead? Probably. Even with the latest increase, Disney’s payout ratio is just 20 per cent, based on the company’s estimated earnings this fiscal year.