Disney Stock Won’t Be a Bargain Until It Has Enough FCF for Dividends

  • Disney (DIS) reported its Q1 earnings showing 23% higher revenue, but both revenue and earnings missed expectations.
  • Disney’s free cash flow (FCF) generated was only 3.6% of sales, and given its heavy content spending, won’t likely rise much.
  • Investors should be concerned since the company is not likely to spend any money on dividends and buybacks anytime soon.
dis stock
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The Walt Disney Company (NYSE:DIS) reported good revenue growth on May 11 for first quarter, up 23% year-over-year (YoY). However, this was 4% below Wall Street estimates, according to Seeking Alpha. Investors in DIS stock may not see dividends or buybacks for a long time, given its paltry free cash flow (FCF).

The good news was that Disney had growth in its streaming subscriber area. However, its whole media division revenues were up just 9% YoY. Moreover, most of the 23% YoY growth came from its Disney Parks, Experiences, and Products division. In fact, the Parks division now accounts for one-third of revenue and almost half (47%) of its operating income.

The problem now for investors is Disney is still generating only paltry free cash flow (FCF).In Q1 it produced just $686 million in FCF. This works out to just 3.6% of its $19.3 billion in Q1 revenue.

DIS Disney $104.30

Moreover, the company told investors on the conference call that it expects content costs will rise in the coming quarter by $900 million vs. a year ago. That could push the company very close to negative free cash flow. That is because the FCF was just 10% this quarter over last year when it was $623 million.

In other words, FCF rose by just $63 million even though sales grew by $2.6 billion in the past year. With $900 million more in capex, FCF could fall from $686 million to negative $214 million. This assumes sales grow moderately or stay the same.

Where This Leaves Investors in DIS Stock

Disney used to pay a consistent dividend to reward its shareholders. Since the end of 2019, the company has stopped returning capital to its shareholders. It stopped paying dividends and stopped buying back its common stock shares.

This has been a disaster for DIS stock. Since peaking at $201.91 on March 8, 2021, DIS stock has fallen almost $100 ($-97.32) to $104.59 as of May 18, 2022. That is a decline of almost 50% (-48.2%).

If Disney had kept its dividend and buyback policies, this might have ameliorated the decline in its share price.

As it stands, with the company’s paltry FCF generation and the forecast that it could turn negative, there is no way the company is going to consider paying a dividend. There is little hope that any shareholder returns will occur in the near future.

There are simply many other stocks with this level of revenue and earnings that pay dividends and have large FCF generation. Therefore, from investors’ standpoint, the company needs to get its act together and decide how to work for shareholders.

Once Disney becomes shareholder-friendly and produces returns for its owners, then there might be a chance that its stock will rise. Until then, long-term value investors will likely stay clear of DIS stock.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.

Article printed from InvestorPlace Media, https://investorplace.com/2022/05/dis-stock-wont-be-an-investment-opportunity-until-it-generates-enough-fcf-to-pay-dividends/.

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