A Mouse-Size Step for Disney’s Dividend

by Marc Bastow | November 30, 2012 10:26 am

Back in August, I complained[1] about Disney‘s (NYSE:DIS[2]) parsimonious dividend policy. Even though many investors are thrilled with the Mouse’s soaring stock price, they’re disappointed with its dividend yield (1.20% on Thursday’s close).

While not enough to make me jump over the moon, Thursday’s announcement of a 25% hike in the annual dividend to 75 cents per share is a step in the right direction. Adding to the happy event is a little Disney lagniappe in the form of paying the dividend out to investors on Dec. 28 (the ex-dividend date is Dec. 10) to beat any dividend tax increases coming our way.

So, thank you. Now what can we expect for the future?

From all the available evidence, it should provide a steady stream of annual increases at least close to the one we’re getting now, which brings the hikes to 114% over the last four years.

Disney is sitting on around $3 billion in cash and is throwing off about $4 billion in free cash flow. It holds a solid S&P bond rating of A on its most recent 3-, 5-, and 10-year issues. And with the continued success of its theme park, media (including the recent purchase of Lucas Films[3]) and consumer operations, its still-paltry 17% dividend payout ratio has plenty of room for increases into the foreseeable future.

But here’s the rub: Disney can’t increase the payout enough to move the needle on the dividend yield, which remains stuck below 1.25% (its forward dividend yield), or less than a 10-Year Treasury Bond.

Of course, the main reason for buying Disney is its steady stock performance, particularly  relative to peers like CBS (NYSE:CBS[4]), Viacom (NASDAQ:VIAB[5]) and Time Warner (NYSE:TWX[6]). Take a quick look at how company’s share price has appreciated over time:

Name YTD Return
1-Year Return 5-Year Return
Disney 34% 46% 56%
CBS 31% 44% 34%
TWX 30% 40% (6%)
VIAB 14% 21% 25%

Indeed, Disney’s new dividend is just a nice little bonus to tide investors over until the payout catches up with price (which means even bigger dividend increases), or it acts as a buffer when growth and the stock price start to slow.

So, my advice is to Mouse fans is keep hanging in there. Don’t worry that its measly dividend yield portends a gloomy stock outlook. Disney should keep thriving, and if the yield doesn’t move very much, it’s likely because your shares are increasing in value.

Which, like Disney itself, is a good place to be.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he was long TWX.

  1. I complained: https://investorplace.com/2012/08/disney-continues-the-magic-ride-for-investors-dis-cbs-viab-twx/
  2. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  3. recent purchase of Lucas Films: https://investorplace.com/2012/11/the-force-is-now-with-disney-dis/
  4. CBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBS
  5. VIAB: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIAB
  6. TWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWX

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