Disney (NYSE:DIS) just made big waves with a mammoth 50% dividend increase — from 40 cents per share to 60 cents. This is an annual payout, not a quarterly one, and based on this total, the dividend yield on Disney stock leaps from 1.1% to 1.6%.
Income investors might turn up their noses at Disney despite this huge increase — and after a 15% bump a year ago. An annual dividend, with just a 1.6% yield? What’s the point of holding?
True, that dividend yield doesn’t exactly make Disney an income play based on payouts alone. And the annual payout means you could technically just buy in now before the Dec. 9 ex-dividend date — that’s the cutoff to share in the January payment — then cut and run as soon as you know the dividend is locked up.
However, Disney isn’t like a utility company or a tobacco stock where the dividend is the biggest source of profit potential. DIS stock as a whole has been performing quite well, and that counts for a lot.
In regard to fundamentals like sales and profits, Disney posted year-over-year growth for both sales and profits in all four quarters of fiscal 2011. What’s more, earnings per share jumped 25% over fiscal 2010 and are expected to grow another 15% next year.
And this comes in a weak consumer environment where movie sales haven’t been all that grand and tourism at Disney theme parks has been soft. While Disney is diversified with television operations such as ABC and ESPN, Pixar and Marvel Studios really drive company revenues. When consumers come back — and they will — Disney will come back big-time, too.
Besides, if you’re a long-term investor, you have to not just approach future earnings but current valuations at which you are buying in. Consider this math by InvestorPlace writer Lawrence Meyers:
“If we put an 15 P/E on Disney, then, on projected 2015 earnings of $4.43 per share, and factor in 1.2% compounded dividend yield reinvested, we get a price target of $72.” Shares as of this writing are around $36 — 100% upside from here, in just five years! That makes Disney both a growth and a value play.
Throw in the big dividend increase as a sign that the company is confident about its cash flow and willing to share profits with investors, and you have a pretty good list of reasons to go shopping for Disney.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.