Disney: Marvel, Star Wars Characters, Large Library Drive Revenue, Buy The Dip (NYSE:DIS)

The Walt Disney Company (NYSE:DIS) is a buy for the growth investor that also wants an increasing dividend estimated to be started again soon. The one-year target of $130 is above the present price by 26%, and it would be worth building a position over the next year when growth from the streaming business and parks business will continue to grow and have positive cash flow.

Walt Disney is one of the largest developers and distributors of entertainment products. Walt Disney is 5.7% of my Good Business Portfolio. Disney is being reviewed using The Good Business Portfolio guidelines, my IRA portfolio of good business companies that are balanced among all styles of investing. The company has growth potential from its streaming businesses and has cash that it uses to increase the business. The vertical integration of the company’s movies synergized with new streaming content and new attractions to its adventure parks and to children’s products like Star Wars provides multi-prong means of earnings growth. Some, like the Lion King, even made it to a Broadway show, with the show open again.

As I have said before in previous articles:

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article “The Good Business Portfolio: Update to Guide-lines, March 2020.” These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keep me ahead of the Dow average.

Fundamentals

Walt Disney is a great investment for the growth investor and dividend income growth investor, with ten years of increasing dividends before COVID made the company stop the dividend. A quote from the 3^rd quarter earnings call by CEO Bob Chapek sums up the good business expansion as the impact of the COVID pandemic decreases, helping the company get back to normal with attendance at its theme parks and movies playing in the theatres:

We had an excellent quarter powered by world-class storytelling, outstanding performance at our domestic theme parks, increases in live sports viewership across our linear channels and ESPN+, and significant subscriber growth at our streaming services which added 15.5 million subscriptions in the quarter, including 14.4 million Disney+ subscribers, of which 6 million were core Disney+ and 8 million were Hotstar. As of the close of Q3, we now have 221 million total subscriptions across our streaming offerings. Our results showcase the ability of The Walt Disney Company’s uniquely diversified business to power our ecosystems and explore growth opportunities across industries and distribution channels. Creative excellence in storytelling that builds deep emotional connections with audiences is at the root of our success. And I am pleased to say that our creative engines are firing on all cylinders across the franchise, general entertainment, and sports. In a testament to the depth, breadth, and quality of our creative teams, we received 147 Primetime Emmy award nominations this year, including 92 for our streaming platforms and 21 for best program in a genre, recognition across formats and distribution channels with 47 different shows receiving nominations, including titles like Only Murders in the Building. Abbott Elementary, What We Do in the Shadows, and The Dropout, right alongside shows from Disney, Marvel, and Star Wars. And most recently, we received an additional 71 news and documentary Emmy nominations across ABC News, National Geographic, FX, Hulu, and ESPN. Pixar’s Lightyear marked the studio’s return to the big screen, and the film debuted on Disney+ last week. Speaking of Disney+, which is now available in 155 markets after recently launching in 53 new territories,

This shows the feelings of the CEO with the continued growth of the Walt Disney business and shareholder return via increased expansion of their classic characters and stories. Walt Disney has good growth and will continue as the pandemic gets controlled by the vaccines distributed worldwide. The S&P CFRA Walt Disney’s one-year price target is $130 with a hold rating of three stars, giving you a possible gain of 26% in a year and making Walt Disney a great buy at this time. The projected one-year P/E is high at 29, which shows Walt Disney’s prospect of growth as the P/E comes down with increasing future earnings. Walt Disney is a large-cap company with a capitalization of $210 billion, well above my guideline target of at least $10 billion. My Walt Disney 2023 projected increase of 20% in operating revenue is good for a solid growing income in the entertainment business.

A good reason to own Walt Disney is to have a company with increasing growth as the COVID virus is controlled. Walt Disney had a below-average dividend yield of 1.2% and had increased for ten years in a row before the COVID virus stopped almost all of their businesses. The five-year average payout ratio was low at 26% before COVID, which allows cash to remain for increasing the business of the company by increasing the capabilities of existing attractions and adding new admission systems, and buying bolt-on companies that provide company growth that brings value to the stockholder. As the Disney sectors start to come back to life and earnings continue to grow, I estimate the dividend will be reinstated in December 2022. Buy the dip and start building a position as the company gets back to full operation.

I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter, on August 10, 2022, Walt Disney reported earnings that beat expectations by $0.10 at $1.09, compared to last year at $0.80. Total revenues were higher at $21.5 billion, increasing 26.3% compared to last year, and beat total revenue by $490 million. This was a good report, with a bottom-line and the top-line numbers beating expected with a beat compared to last year. The next earnings report, Q4, will be out in November 2022 and is expected to be $0.62 compared to the previous year at $0.38, a great recovery.

One method I use to compare companies is to look at the total return compared to the market. Walt Disney’s total return of 15.69% compared to the Dow base of 60.09% over my 70-month test period makes Walt Disney a poor investment but now has created a special situation as Disney returns to full operation as the businesses now are all open and growing. Looking back five years, $10,000 invested five years ago would now be worth over $12,300 today. This gain makes Walt Disney a good investment for the total return investor looking back, which has future growth with increased earnings as the COVID virus is controlled and the Disney+ streaming business and major new content continue to grow. COVID virtually shut down all of Disney’s businesses, so now is the time to take advantage of the dip and start a position in Disney as the company recovers.

One of my guidelines is whether I would buy the whole company if I could. The answer is yes. The total return is good looking forward, and the increasing dividend for ten years before COVID makes a well-balanced combination of growth and income. The Good Business Portfolio likes to embrace all kinds of investment styles. Still, it concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and generates a fair income stream.

Most of all, what makes DIS interesting is the long-term growth of the world economy as the COVID virus gets controlled by vaccines, giving you increasing growth in the entertainment sector. I am 82 years old, and Disney+ is not just for kids; since I am a Star Wars fan, I love spin-offs like Obi-Wan Kenobi and the Bad Batch, and I can go thru my second childhood by watching Snow White and Beauty and the Beast. The graphic below shows how Disney uses characters from successful series like Toy Story to continue with more content that also sells toys for the characters.

Risks and Negatives of the business

Walt Disney has great characters and franchises like Star Wars, and they keep adding new attractions to existing theme parks and developing products that increase their sales. Still, there is always the risk of a new product failing. As the COVID virus is controlled, DIS’s earnings should continue their steady growth unless they are impacted by new varieties of the virus. There is also always the risk of government regulation that could hurt Walt Disney’s attendance rates and cause a decrease in earnings. The last factor is the exchange rate to the dollar since DIS has a worldwide business.

Conclusions

Walt Disney is a good investment choice for the conservative dividend investor with its below-average dividend yield prior to COVID and an appropriate choice for the total return investor looking forward. The turn-around opportunity for Disney is 26% over the next year. Walt Disney is 5.6% of The Good Business Portfolio and will be held to watch it grow. DIS will be held in the portfolio and will be trimmed when it reaches 8% of the portfolio. Next year will be a transition year as the operations get fully back to normal, with the COVID virus getting further controlled with cash being used to grow the business and restart the dividend. If you want a possible restart of the dividend and fair total return in the entertainment business, The Walt Disney Company may be the right investment for you to start a position; buy the dip in DIS.

The total return for the Good Business Portfolio is behind the Dow average from 1/1/2022 to October 14 by 1.60%, which is a loss below the market loss of 18.45% for a total portfolio loss of 20.05%. Each quarter after the earnings season is over, I write an article giving a complete portfolio list and performance. The latest article is titled “The Good Business Portfolio: 2022 2^nd Quarter Earnings and Performance Review.”