Walt Disney Company (DIS) has seen its stock lose about 16.50% from a high of $116.10 a share. I find this to be a great opportunity to buy more shares of Walt Disney Company because I see this company as a “Forever Company”. The company has a great track record and they are making the necessary steps, in my opinion, to continue to grow the business. In this article, I will cover the steps Walt Disney is taking, and I will cover both the company’s fundamentals and its valuation.
I added 13 shares @ $97.75 on 9/29/2017.
You can check out my entire portfolio on my website.
The Walt Disney Company is an entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media.
Let’s take a look at how Disney has been performing in the past 10 fiscal years. We will look at top-line and bottom-line, and we will see where they are heading.
Revenue has been growing at a compound annual growth rate ((CAGR)) of just 5.11% since 2007. This kind of top-line growth is good but not great. However, I am going to mention some things that the company will be doing to continue the growth it a higher rate. Net income, on the other hand, grew at a CAGR of 8.03% in that same time frame.
Looking at the most recent company report, we see that 3Q17 revenues have been flat compared to 3Q16. We also see the same kind of results for Nine Months Ended.
Source: Q3 2017 Company Report
We see that two segments, Media Networks and Studio Entertainment, took the biggest hit. The Media Networks segment had its operating income decreased by 22%. This big decrease was caused by ESPN due to higher programming costs, lower advertising revenue and severance and contract termination costs. Studio Entertainment segment did not fare so well with a 17% decrease in operating income. This was due to the decreased in theatrical and home entertainment distribution results.
Here are some things that the company will plan on doing to increase their top and bottom line so that the kind of results I mentioned above won’t happen again. The first method, Disney will be releasing its own online streaming service sometime in late 2019. I think this a fantastic idea. I believe that anyone with a young child will sign up for this service. The second method, Disney Park in Shanghai is doing much better than expected and there are talks about expanding it. This move will continue growth in the Parks and Resorts segment which saw a 12% growth in 3Q17. The final method, Disney is launching a new ESPN service which will give subscribers a lot more live sports than ESPN’s linear channels.
Here is what Christine M. McCarthy, Senior Executive Vice President, and Chief Financial Officer had to say about some of the services that Disney will be implementing.
“Our ability to successfully execute on our core strategy, coupled with our plans for new direct-to-consumer offerings, give us continued confidence in our ability to drive shareholder value,”. Source: Q3 2017 Company Report
I think all of the above methods will absolutely help Disney with the ability to drive shareholder value.
Nevertheless, net margin has increased every year since 2010 and it currently stands at 16.88% which is slightly higher than its peers.
Source: Simply Wall St
Earnings per share ((EPS)) CAGR has grown 10.95% for the past 10 years. Last year, Disney EPS was $5.73. Analysts expect 2017 EPS to be around $5.79, and in 2018, to be $6.45. With all the steps that Disney is taking, I absolutely think that theses EPS expectation will be true. The acquisition and the launch of direct-to-consumer services will give Disney new growth opportunity. These new services will only strengthen the Walt Disney brand.
Now let us talk about Walt Disney dividend and its dividend history.
The company has increased its dividends for seven straight years. I normally like to buy a company that has been increasing its dividend for at least 10 years, but I do make exceptions. Disney has a five-year dividend growth rate of 30.1%, and the most recent dividend increase was 9.9% which was announced late last year. I don’t see Disney growing its dividend at the five-year average rate any longer; however, I do see them growing it around 9% or slightly higher going forward. I expect that the company will again announce another dividend increase by the end of this year.
Walt Disney has a current dividend yield of 1.61%. This means that Walt Disney has a Chowder Rule of 31.71 (Chowder Rule is when you add the current dividend yield with the five-year dividend growth rate). Normally, you want to look for a Chowder Rule of 12 or higher, and Walt Disney blows that out of the water. This helps determine if the company is worthy of further research.
Can the Walt Disney continue to pay its dividend and increase it?
Yes, Walt Disney can.
The dividend payout ratio is currently at 27%. This is a low payout. This gives Disney the opportunity to continue to grow its dividend for the foreseeable future. Also, CFRA expects an EPS CAGR of 9% for the next three years. With an EPS growth of 9% and plenty room for the dividend to grow, this is the recipe for a profitable investment.
Source: Simply Wall St
How much per share should you pay for a wonderful company like Walt Disney?
One investing metric that I like to use when I am finding a company valuation, is its 10-year normal P/E average as well as its 5-year PE average. Currently, Walt Disney has a PE of 17.63. Its 10-year PE average is 17.5 and its 5-year average is 18.4. This leads me to believe that the company is currently at fair value territory. Let’s look into this deeper.
Below is a picture from fastgraphs.com. Whenever the black line is under the orange line and/or blue line (depending on the situation for a particular stock), it is considered to be undervalued. We can see that the black line is just under the normal P/E blue line. I am using the blue line as my guide because it looks like the company tends to follow this line. This translates that the company is fair to undervalue, in my opinion.
Here we can see what kind of Rate of Return ((ROR)) we may expect from this company if it hits it 5-year Normal P/E average of 18.4. Based on this P/E, we can expect an annual ROR of 13.54%. This ROR looks to hold true because analysts have been correct forecasting Walt Disney with an accuracy of 83% based on past earnings. This gets me excited because it’s hard to find an excellent company with the potential of double-digit annual returns.
Walt Disney has a 5-year dividend yield average of 1.3%. An investor can now get a yield of 1.61%. It is almost at its highest point since 2008 when Walt Disney had a yield of 1.89%. Whenever a company current dividend yield is higher than its 5-year average, I get excited because in most cases the company tends to be undervalued when that happens.
Source: Simply Wall St
Now let’s find out how much it is worth per share? My assumption of the DDM model is a 9% growth rate for the next three years. The years after, I used a 9% growth as well, which is very doable for this company.
- My DDM Analysis: $170.04
- CFRA Fair Value: $103.47
- Fair Value from SIMPLY WALL ST: $77.94
- Yahoo Analyst Price Target: $111.14
- FASTGraphs.com: $109.32 (Using the Normal P/E Line of 17.5)
Averaging out the five fair price estimates gives us a fair value of $114.38. DIS is currently at $96.93 (10/12/17). This means that Walt Disney is 15.26% undervalued.
Investors looking for income now should look elsewhere because of Walt Disney low dividend yield. However, if an investor has a long-term outlook, they can do really well by buying shares and holding it. Walt Disney has earnings growth, dividend growth, and they are making the right moves.
I currently have 23 shares of Walt Disney. I made my first purchase a few months back.
With the recent purchase of 13 shares and the company paying a dividend of $0.78 a share, this will increase my annual dividend income by $20.28 My forward annual dividend income now stands at $4,217.54. You can see my monthly dividend income as well as other passive income at my site.
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