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 38^th. It adds $31.05 of expected dividend income, increasing DivGro's projected annual dividend income to $5,198.35.