Although I always suggest owning a long-term diversified portfolio outside of one’s retirement account, it’s not always possible. With retirement assets, however, you definitely want broad diversification. As I’ve added funds to my 401(k), I’m trying to figure out just what I should include in this mix.
Today, as part of my series on potential candidates for my retirement portfolio in 2013, I’m looking at Walt Disney (NYSE:DIS).
I have a theory about most people’s perception of Disney. They think it’s all theme parks and films. Yet Disney’s empire extends halfway to Asgaard. It owns all the ABC TV networks, the entire ESPN family and some 46 radio stations. My kids play on its popular Internet virtual world ClubPenguin.com. And, yes, it owns theme parks…along with all-inclusive resorts, a cruise line that friends tell me is 5-star caliber, conference centers, campgrounds, golf courses, ESPN-themed restaurants and that thing you see in every child’s home — merchandising of all of those Disney characters.
Oh, yes, perhaps you’ve been to one of its live stage shows, purchased some of its direct-to-video content and watched its TV shows.
Speaking of movies, Disney has made three acquisitions that — to my mind — will secure tens of billions in revenue for decades, likely making multiple returns on its investments. These are the famous brands of Pixar, Marvel, and LucasFilm.
Movies produced by these three entities will always enjoy success, provided they continue to employ people who understand great storytelling. That’s the key to why all the movies from these brands have always done well. In addition, all three — particularly Marvel — have deep fan bases that will show up for any movie that’s released.
Disney is also one of those companies where macroeconomic concerns don’t really faze me. Take a look at Disney’s net income and cash flow during the financial crisis: 2009 net income dropped 25% year-over-year from 2008, from $4.4 billion to $3.3 billion. Yet despite that drop, free cash flow only fell from $3.89 billion to $3.57 billion.
The importance of these results cannot be underestimated. The demonstrate that even in the absolute worst of times, Disney won’t go broke — or even close to broke. Many other businesses had trouble staying afloat.
In 2010, net income jumped back up 20%, and free cash flow rocketed to $4.47 billion. It kept chugging along in 2011 and 2012 — with net income up another 20% and 18%, respectively, and free cash flow at $3.45 billion and $4.21 billion, respectively. Disney sits on $6.1 billion in cash, and its debt service is $369 million on more than $10 billion in debt.
Disney’s net margins are 13.44%, more than 4 percentage points above Time Warner (NYSE:TWX), and 6 points above News Corp (NASDAQ:NWSA). Only Viacom (NASDAQ:VIAB) is equivalent. Disney has just recently traded above a price-to-earnings growth ratio of 1, settling in at 1.6. This might suggest it’s overvalued. However, when you combine the long-term projected growth rate of 11.4%, add in the 1.4% yield and give it a 20% premium for its brand value and cash situation, it probably is about 10% overvalued.
However, this is intended as a long-term hold. Consequently, I feel very comfortable buying it here. I’m happy to own a brand still growing strongly after all these years.
As of this writing, Lawrence Meyers didn’t own an securities mentioned here, but he intends to buy DIS within two weeks.