Saturday, February 7, 2015

Recent Buy: DIS

Jan 27, 2015: Bought 27 shares of DIS at $94.32 per share.

The Walt Disney Company (NYSE:DIS), more commonly known as Disney, is a diversified international family entertainment company based in Burbank, California. Founded on October 16, 1923, by Walt Disney and Roy O. Disney, the company established itself as a leader in the American animation industry before diversifying into live-action film production, television, and theme parks. Today, Disney operates in five business segments: media networks, parks and resorts, studio entertainment, consumer products and interactive media.

Disney pays dividends annually in the month of January and has a streak of 5 years of dividend increases. My initial yield on cost (YoC) is 1.22%.



Disney's stock has significantly outperformed the S&P since September 2011 and, consequently, over the last 10 years. DIS has a 5-year Beta averaging about 1.16.

Source: Scottrade

Analysis of DIS


My fair value estimate of DIS is $94.50, so I'm buying shares at about fair value. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.

DIS passes the following of my selection criteria:
  • A streak of at least 5 years of dividend increases (5 years)
  • Chowder rule: Dividend yield plus 5-year CAGR exceeds 12% (21%)
  • Earnings per share (EPS) percentage payout is less than 40% (27%)
  • Debt to equity ratio is below 50% (33%)
  • Price to earnings ratio (P/E) is less than 20 (Forward 18.82x)
  • P/E to annual EPS growth (PEG) ratio is less than 2 (1.33)
  • 5-year CAGR is at least 10% (19.7%)
  • Reasonable confidence in continued dividend growth (Yes)
DIS fails the following of my selection criteria:
  • P/E ratio is less than 20 (TTM 21.35x)
  • Dividend yield exceeds 2.75% (1.22%)
  • Price discount is at least 5% of fair value estimate (0.19%)
Based on these statistics, DIS earns 5 out of a possible 7 stars: (*****--)

The following chart shows dividend payments and earnings per share for DIS over the last 10 years. Like many companies, DIS experienced a tough year in 2009 as far as earnings are concerned. Since then, earnings growth has been impressive, with dividend growth following suite:


DIS currently yields 1.22%, by far the lowest yield that I've accepted for DivGro. However, the stock's low payout ratio of just 27% (and more recently, about 20%) means there is ample room for continued rapid dividend growth:



Other ratings for DIS


 Zacks Rank 2-Buy
 S&P Capital IQ's Stock Report (****-) Buy
 Thomson Reuters StockReport+  (10/10) Positive 
 MorningStar Rating (*****)
 The Motley Fool's CAPS Rating (*****)

According to S&P Capital IQ, Wall Street consensus opinion on DIS is Buy/Hold, with 12 Buy recommendations (37%), 5 Buy/Hold recommendations (16%) and 15 Hold recommendations (47%).

Concluding Remarks


In a recent post, I reported on a bonus deposit I made into my DivGro account. In the process, I disclosed my indirect relationship with Disney through my employment at Pixar, one of Disney's subsidiaries. I work as an effects artist and in no way have access to inside information that would help me make investment decisions about Disney stock. In the research for this article, I followed my normal approach of consulting various on-line sources, including Seeking Alpha, GuruFocus, FinViz, S&P Capital IQ, Thomson Reuters, Morningstar, and other blogger's posts, like this one from Dividend Mantra and this one from Nicholas Ward.

On Tuesday, Disney announced exceptional first quarter earnings results, with year-over-year revenue increasing 9% and earnings per share increasing 23%. Given the significant earnings surprise and strength evident across all segments, the stock rallied to over $100 per share, reaching an all-time high of $102.99. Dan Strack eloquently argues that the historically high valuation is warranted and can be sustained throughout 2015, especially considering the popularity of the Avengers and Star Wars franchises.

Of course, Disney's future success is not tied only to the studio entertainment segment. In fact, in fiscal year 2014, studio entertainment accounted for only 15% of total revenue. Media networks dominate with 43% of total revenue. It comprises broadcast cable, radio, publishing and digital businesses, including the Disney/ABC Television Group and ESPN Inc. Parks and resorts (31%) include popular vacation destinations like Disneyland in California and Walt Disney World in Florida as well as the Disney Cruise Line of four ships.

Disney has actively managed cash flow, returning free cash to shareholders through share repurchases and dividends. In fiscal 2014, Disney bought back 84.4 million shares for approximately $6.5 billion.

There are several risks for Disney that prospective investors should consider carefully. As a member of the Consumer Discretionary sector, broad economic downturns will impact Disney negatively. Competition in the media networks segment is fierce and programming cost continues to escalate, especially for NFL and college football rights. Cable subscription cancellations and advertising slumps can hurt revenues. Finally, Disney has huge international presence, so the company remains prone to unfavorable foreign currency fluctuation.

In my view, the positives far outweigh the negatives. Current yield is low but the dividend growth potential more than compensates. Consider the following calculation, showing total return for an investment in Disney 10 years ago:
Source: GuruFocus

The 10-year YoC for this investment is 4.26%. Furthermore, consider the dividend growth rate and how its is accelerating. If the low-end value of 14.5% CAGR could be maintained over the next 10 years, I would be more than just satisfied with my investment in DIS!

This purchase initiates a new holding in DivGro – the 38th. It adds $31.05 of expected dividend income, increasing DivGro's projected annual dividend income to $5,198.35.

24 comments :

  1. I still haven't jumped on the Disney gravy train, but congrats to you and all the other shareholders out there. Disney has had a remarkable run over the past few years and I hope it continues for you. Perhaps when my wife and I have kids and they are old enough to understand, I'll pick them up a few shares.

    Good luck to you and Disney

    ReplyDelete
    Replies
    1. Thanks, American Dividend Dream! With the last of my stock options expiring in January, I finally jumped on the bandwagon and bought some shares! The timing was great for this purchase, as it happened just before this amazing earnings announcement. On the other hand, it would have been great if my options expired in February instead... :-) Anyway, I'm not complaining!

      Cheers
      FerdiS

      Delete
  2. Nice buy DivGro...My wide and I were just commenting the other day that Disney has done a great job riding the Frozen craze (it's has been well over a year!!). Nevertheless, great stock. The yield isn't high but is growing at a nice rate. Plus, it appears the dividends are very stable considering the dividends is such a small part of their EPS.

    Hope you don't mind, we added your recent purchase to our Collection of Recent Buys. Keep up the great work and Buys! :)

    AFFJ

    ReplyDelete
    Replies
    1. Of course not, AFFJ -- link away...

      Disney's ability to "cross-pollenate", so to speak, never seizes to amaze me. In addition to movie theaters, you have television, cable, DVDs, merchandise, games, theme parks, marketing, and cruise lines which all provide outlets for what artists create.

      Cheers!

      Delete
  3. Whew, got in before that nice big pop! While I'm glad they are doing well, I wanted a few more months in the low 90s to continue adding shares in my Loyal3 account! Oh well, I'll continue adding if/when they slow down!

    ReplyDelete
    Replies
    1. Yup -- sweet that I got in before the earnings announcement. I think it will take a while for fair value estimates to catch up -- or maybe the stock price will ease back down to fair value... On the other hand, if the Avengers and Star Wars do well, we could see even higher highs!

      Delete
  4. Great buy. I was at Magic Kingdom a few weeks ago, and OMG there are a lot of people. After spending the weekend in Dis, I have to be a part owner.

    ReplyDelete
    Replies
    1. Thanks, FFdividend -- great that you visited the Magic Kingdom! We have visited Disneyland many times, once the day after Christmas. That was nuts. I think they closed the gates for a while in the afternoon...

      Delete
  5. Congratulations on the nice move. DIS is a solid company.

    ReplyDelete
    Replies
    1. Thanks, mu. I agree, DIS is a solid company. Here's hoping for many dividend increase in the future!

      Delete
  6. Disney has been on quite a run lately. I think even with the stock price heading upward Disney is a great buy. The acquisition of Pixar has led to a very strong pipeline of animated films. I predict Disney will deliver strong returns for many years to come.

    ReplyDelete
    Replies
    1. Indeed -- Disney has acquired not only Pixar, but also Marvel and Lucasfilm. Of course I'm hoping your prediction will come true... I think it just might! Thanks for commenting...

      Cheers
      FerdiS

      Delete
  7. Ferdi,

    Great job getting in before the jump. Love the company. Really one of my favorites. It's too bad I just recently invested myself. I'm hoping to add more shares some time this year, but we'll have to see how the valuation goes.

    Glad to be a fellow shareholder!

    Best regards.

    ReplyDelete
    Replies
    1. Hi Jason -- good to hear from you!

      Disney is a great company and things are looking quite positive for 2015 and beyond. We'll have to see how things develop. Perhaps you (and I) will get another chance to add more shares!

      Cheers
      FerdiS

      Delete
  8. Nice buy, FerdiS. DIS sure has outperformed S&P500 by quite a lot. I didnt realize the difference was so big. Congrats on adding a high quality name to your portfolio.

    Best wishes
    R2R

    ReplyDelete
    Replies
    1. Thanks, R2R -- yes, Disney's outperformance since 2012 is stunning. Its a little surprising given the low Beta.

      Take care!
      FerdiS

      Delete
  9. Well, though not in my portfolio, DIS has certainly been popular in recent weeks among the dividend bloggers. Quite a few have added or initiated positions in this one. I'm still amazed at the power of 'Frozen' for continuing to deliver for DIS. Thanks for sharing.

    ReplyDelete
    Replies
    1. Yes, the popularity is quite surprising given Disney's low yield. For me, though, the dividend growth rate is what sways me. As I pointed out elsewhere, it is accelerating...

      1 Year 3 Year 5 Year 10 Year
      33.70% 29.10% 27.50% 14.50%

      Cheers
      FerdiS

      Delete
  10. Disney rocks! ;-) Growth showed by this company is remarkable. I'm a fan and glad you joined us! hehe

    ReplyDelete
    Replies
    1. Agreed! I'm very happy to own some Disney shares now that I'm no longer invested through stock options. Take care!

      Delete
  11. HUGE HUGE HUGE fan of the company. The amount that they own beyond their namesake is unbelievable. How many Billions is the 3 scheduled star war movies going to bring in with the merchandising? and that is if they are terrible! If they are great flicks the number is going to be nuts.

    Then you have ESPN one of the only reasons people have cable lol and even if they cut the cord they have already made a deal with Sling.

    ReplyDelete
    Replies
    1. I agree -- merchandising is going to be huge! There is lots of excitement about Star Wars -- the YouTube trailer has over 56 million views and it plays elsewhere, too.

      Thanks for commenting!

      Delete
  12. I love the company so much and too bad that I haven't had a chance to invest it yet. I have been watching it and hopefully valuation becomes more attractive or probably I should jump in soon haha.

    ReplyDelete
    Replies
    1. I waited a long time to invest directly, myself. As mentioned, I had assigned stock options but those expired now so I decided to get in. Good luck and I hope you'll join us in ownership soon!

      Delete

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