Source: PaxForex Premium Analytics Portal, Fundamental Insight
Disney has not long ago re-engaged its longtime CEO, Bob Iger, who has retired and returned to his former duties. He plans to do something equally meaningful for shareholders by reinstating the dividend payout later this year. This is a big deal, even for investors who don't care much about dividend income.
Let's break down why Disney's decision to reinstate the dividend represents a huge boost that investors and traders shouldn't overlook.
Like many other companies, Disney was forced to suspend its dividend during the pandemic in order to conserve cash due to its impact on the business. While many of these companies have already resumed paying dividends, Disney has left payouts out in the cold while coping with the effects of the pandemic and making significant investments in streaming. That's about to change, however.
In his first quarterly conference call since returning to the company, Iger said:
"Now that the effects of the pandemic on our business are largely behind us, we intend to ask our board of directors to approve a dividend reinstatement by the end of the calendar year. Our cost-cutting initiatives will make that possible. And while it will be a modest dividend at first, we hope it will grow over time."
Chief Financial Officer Christine McCarthy provided more detailed commentary on future payouts later in the call. She stated: "Given our recovery from the pandemic, strong balance sheet, and commitment to cost-cutting, we believe we will be in a position to declare a modest dividend by the end of this calendar year. The dividend amount will likely be a small fraction of the pre-pandemic dividend, with the intention of increasing it over time as our earnings grow."
The size of Disney's upcoming dividend may not satisfy income-focused investors. Iger and McCarthy said the payout will be modest, with the CFO suggesting it will be times less than previous levels (Disney paid a semi-annual dividend of $0.88 per share or $1.76 per year). Thus, Disney is likely to offer an unattractive dividend yield (for perspective, a fully recovered rate would yield 1.8% at the current share price versus 1.7% for the S&P 500).
However, the size of the dividend is not that significant. What matters is that Disney is beginning to pay out, which the company intends to increase. That's because the data show that dividend initiators and increases have historically produced higher returns.
Before the pandemic, Disney was a dividend growth stock. It steadily increased payouts during Bob Iger's tenure as CEO. Not surprisingly, its stock has outperformed expectations.
However, since the announcement of the suspension of dividend payments in May 2020, Disney stock has lagged behind the market hard. Overall, the stock is down about 4% (negative average annualized total return of 1.5%) versus more than 45% of the S&P 500's total return (13.7% annualized).
This is not to say that Disney will necessarily start to perform well once the dividend is resumed. However, history shows that companies that increase their payouts (because their earnings grow to support higher payouts) tend to outperform companies that cut dividends, don't pay them, and don't increase them. In Disney's case, the company seeks to pay a growing dividend, supported, as McCarthy notes, "as our earnings grow." This combination of revenue growth and dividends may give Disney stock the opportunity to outperform expectations over the long term.
As we know, Disney had to suspend its dividend during the pandemic to conserve cash. Since then, however, the company's returns have lagged far behind the broad market, which is not surprising since this often happens with dividend-paying stocks.
This is why management's announcement that they plan to resume paying dividends to shareholders later this year is such an important development. Companies that pay a growing dividend have historically delivered superior results (as Disney demonstrated during Iger's leadership). Therefore, the resumption of dividend payments is an important development that no investor should ignore.
As long as the price is above 94.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 99.86
- Take Profit 1: 105.00
- Take Profit 2: 109.00
Alternative scenario:
If the level of 94.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 94.00
- Take Profit 1: 90.00
- Take Profit 2: 85.00
