Walt Disney Is A Must Buy Dividend Growth Stock
Walt Disney is a leading global entertainment and media company that operates through five segments, namely: parks and resorts, studio entertainment, media networks, consumer products and interactive. The company has a market capitalization of $86 billion and reported annual revenues of approximately $40 billion in the financial year ended 2012.
Drop in share price
In a press release issued on October 30, 2012, the company announced the acquisition of Lucasfilm for $4 billion. A few days later in the conference call, its management mentioned that the company would face some challenges especially in the first quarter of FY2013 largely due to a hike in sports rights cost as well as the expected deterioration in home-video sales. These announcements were the primary reason behind the stock's downward push that is currently trading near $50.
A year of major investments
Star Wars to bring top-line growth
This deal also means that Disney now owns the Indiana Jones franchise as well. Star Wars series have generated approximately $5 billion in worldwide ticket sales, second only to Harry Potter. This signals the importance and value of this product to Disney.
We believe the acquisition will dilute the company's earnings in the short-term, however, it would lead to a boost in earnings after the dilutive period is over and when the new Star Wars film is released.
Investment in parks
The company has invested heavily in theme parks and to a good reward which is starting to reflect positively in the segment's financials. The revenues generated showed growth of approximately 10% over 4Q 2011 revenues, largely due to an increase in visitors to its theme parks in Hong Kong and California as well as tourists spending more on cruise ships. Disney's recently finished Aulani project is also contributing to the impressive growth in the top line as well as operating income. The management mentioned in the latest conference call that its investments related to the theme parks would reach $500 million by FY 2013. However, the end of 2012 would also be the company's peak year for capital expenditures which will drop by about $1 billion by the end of FY 2013. We believe the company's latest investments in California adventure as well as full-year contribution of its cruise ships will bring top line and EBIT growth.
The stock currently offers a dividend yield of 1.22%, which iswell supported by its free-cash flows that are growing at an impressive rate. In the financial year ended 2012, the free cash flows grew by a whopping 22% to reach a little over $4 billion compared to $3.4 billion in the previous year. The company has historically produced operating cash flows well in excess of its payouts which come in the form of cash dividends and share buybacks. In the financial year 2012, the company returned a total of $3.1 billion to its shareholders in dividends and buybacks while generating operating cash flows of approximately $8 billion which indicates its operational strength to sustain its modest payout (currently 19%).
Disney has not only managed to keep its payout low which meant it was able to pursue strategic options, but it has also returned capital to its shareholders in the form of dividend growth. If we analyze the dividend track of the company, the growth in dividends is visible. Dividends have grown at a five-year CAGR of 16% after incorporating the recent 15-cent increase.
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