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Disney's Appeal as a Long-term Dividend Growth Stock

Walt Disney founded his namesake company in 1923. Since then, the business has gone on to become one of the most iconic brands ever created. Today, Walt Disney (DIS) is a leading entertainment company with $65 billion in revenue. 

The media conglomerate is highly diversified and vertically integrated with four business segments that complement one another:

  • Media Networks (38% of sales, 47% of profits): TV programming (ABC TV and cable channels like A&E, History, Lifetime and ABC Family, ESPN network), radio, and television stations. In total, the company has about 100 Disney-branded television channels that are broadcast in 34 languages and 164 countries.
  • Parks & Resorts (43% of sales, 49% of profits): owns theme parks and resorts around the globe including Walt Disney World In Florida and Disneylanda in California, Paris, Shanghai, and Hong Kong.
  • Studio Entertainment (13% of sales, 11% of profits): produces live-action and animated films under the Walt Disney Pictures, Walt Disney Animation, Pixar, Marvel, Lucasfilm (Star Wars, Indiana Jones), and 21st Century Fox studio banners.
  • Consumer Products & Interactive Media (6% of sales, -7% of profits): licenses Disney's trade names, characters, and visual and literary properties, develops and publishes mobile games, and sells its products through its own online stores and various retail outlets around the globe.
Source: Disney Investor Presentation

The company has grown its dividend each year since 2010 and has paid uninterrupted dividends for more than 25 straight years. 

Business Analysis
Disney is one of the most effective storytellers in the world. People love stories and have been telling them for thousands of years. As an article in The Atlantic noted, “Humans are inclined to see narratives where there are none because it can afford meaning to our lives, a form of existential problem-solving.”

Not surprisingly, forming a business around this existential human need has worked out well for Disney over the years – the company is one of the most iconic consumer brands and is routinely named one of the world’s top 15 most valuable brands. Star Wars, Snow White, Mickey Mouse, Cinderella, Thor, and Frozen are just a few of Disney’s well-loved storytelling assets.

The crux of the company’s success lies in its ability to consistently identify and create high-quality branded content. Thanks to nearly 100 years of developing timeless and beloved films and other forms of intellectual property, Disney has developed a powerful arsenal of brands that it plugs into one of the most impressive marketing and distribution machines ever created.

The company's success has also been fueled by the acquisitions of Pixar, Marvel, Lucasfilm, and now 21st Century Fox. These are some of the most successful film studios in the world, having produced hits like Star Wars, Toy Story, Pirates of Caribbean, and X-Men. When it comes to blockbuster franchises, no one comes close to Disney.

Once Disney has created a new favorite character, movie, or show, it can leverage that content across almost all of its businesses and technology platforms, reinforcing their recognition with consumers and creating a long, diversified tail of income. 

For example, the company's vertically integrated operations mean that it can produce a great movie, then later show it across its numerous TV channels. It can also merchandise its intellectual property via games, apps, clothing, and toys.

It’s amazing to think how much money a character like Mickey Mouse is still making for Disney after its initial launch in 1928 despite constantly evolving consumer tastes. Disney clearly has a knack for developing timeless content and stories that appeal to our foundational human traits.

Meanwhile, Disney owns some of the most popular theme parks in the world, where it is continuously incorporating its films and franchises into improvements that help drive strong visitor growth and strong occupancy. 

Disney's ability to constantly improve its parks has given the company amazing pricing power over the years. In 1971, a day pass to the Magic Kingdom at Disney World cost $21 (adjusted for inflation), according to Travel and Leisure. Today a pass costs $159!

Perhaps most impressively of all, Disney has seemed to crack the code on consistently producing quality movies that avoid genre burnout. For example, its Marvel films, while technically superhero blockbusters, are increasingly branching out into more diverse subgenres that include comedies, heist films, and political thrillers that make them a hit with both critics and global audiences.

Armed with arguably the most valuable content library in existence, Disney will soon introduce what the company is calling its most important product launch in decades: Disney+, Disney's subscription-based streaming service. Along with Disney's other streaming services ESPN+ and Hulu, the company is poised to profit on the global trend of consuming entertainment over the internet:
Source: Disney Investor Presentation

Between Disney+, ESPN+, and Hulu, the company believes it can reach upwards of 100 million subscribers, which would make Disney the world's second-largest direct-to-consumer media provider, behind only Netflix.

Controlling the media chain from content creation through distribution should help Disney stay relevant with consumers while also keeping a greater amount of profits for itself rather than sharing the wealth with various middlemen. 

Overall, Disney enjoys a number of enduring competitive advantages that help ensure it will maintain its world-class entertainment empire in the years ahead.

Many of the company’s assets are nearly impossible for competitors to replicate because of their dependence on Disney’s trademarked brands (e.g. Disney World). As a result, the firm is able to create strong emotional attachment and command strong pricing power with consumers. After all, where else can you visit the Magic Kingdom?

With an ability to develop memorable content for practically any demographic, geographic region, and technology medium, Disney appears to have a long runway for profitable growth.

Key Risks
Disney investors have become excited about the company's ambitious streaming strategy. However, it's important to remember that Disney's growth plans aren't necessarily going to drive a substantial increase in revenue or earnings anytime soon.

For example, Disney expects Hulu to generate $1.5 billion in operating losses this year and not become profitable until 2023 or 2024. Similarly, Disney+ isn't expected to start generating positive free cash flow until 2024. ESPN+ is expected to breakeven in 2023.
Source: Disney Investor Presentation

CEO Bob Iger has admitted that streaming will require forgoing high-margin licensing revenues such as the roughly $500 million per year it was getting from Netflix. Meanwhile, by 2024 total content costs are estimated to rise to about $4.5 billion per year, including third-party licensing.

With numerous media giants also rushing to the market with their own offerings, streaming is certainly a crowded field with uncertain long-term economics. 

Should Disney's streaming efforts fail to generate the type of long-term growth and profitability management expects, investors could wind up disappointed and re-rate Disney's valuation lower.

Investors should also note that Disney's theme parks and studio businesses can have cyclical results. A strong economy results in higher park occupancy levels and an easier ability for Disney to increase prices for lodging, tickets, and food. And the studio segment's movie profits are lumpy and unpredictable, driven by the success of new movies hitting the theaters. 

Weakness in either of those businesses is likely to be temporary, but it can be enough to weigh on the stock. 

Another risk factor to monitor is Disney's leverage. The company took on more than $35 billion in debt to buy Fox, resulting in an increase in its leverage ratio from 1.4 to 3.1.  Fortunately, Disney's balance sheet remains strong overall, indicating there isn't much danger to the payout from the company's currently elevated debt burden. 

However, slower dividend growth in the low- to mid-single digits seems likely to continue over the next few years as Disney continues reducing its leverage and ramping up its investments in streaming services and theme parks.

Finally, Disney's CEO Bob Iger, who's overseen Disney's golden age of growth as CEO since 2005, expects to retire in June 2021. Iger will leave big shoes to fill in running the world's largest and most complex media and entertainment empire, especially as the content creation and delivery world continues evolving at a fast pace.

Closing Thoughts on Walt Disney
Disney has proven itself to be one of the most iconic and dominant entertainment empires in the world. The company's ever-growing portfolio of beloved brands and fast-expanding distribution network have found success across countless generations, and in nearly every country.

Simply put, Disney possesses one of the strongest portfolios of hard-to-replicate assets in the world. With demand for content continuing to rise over the long run, the company’s ability to monetize its intellectual property should continue to strengthen.

However, Disney is now at an exciting crossroads, attempting to digest its largest-ever acquisition while simultaneously stewarding no fewer than three large streaming platforms and overseeing a substantial expansion of its beloved parks. 

Given the company's higher expenses expected in its future, plus the need to deleverage, Disney investors should expect much slower dividend growth than in recent years. However, for patient investors, Disney seems likely to remain an appealing long-term dividend growth story.

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