Since I wrote about the recent re-discovery of dividends by company boards on November 25, another company has joined the dividend hit parade with a bullet.
On December 1, Walt Disney (DIS) increased its annual dividend to 60 cents, a 50% jump from the prior 40-cent annual payout. (The new dividend will be paid on January 18, 2012 to shareholders of record on December 16.)
This isn’t a wink from the company, but instead a whap upside the head. Disney is telling investors that a capital-spending cycle is coming to an end, and with that end the company will see a big increase in free cash flow that can be distributed to investors as dividends and used to buy back shares.
For the fiscal 2011 year that ended on October 1, Disney showed a huge jump in capital spending to $3.6 billion, from $2.1 billion in fiscal 2010.
But as the company said in its fourth-quarter earnings release, “The increase in capital expenditures was primarily due to the final payment on our new cruise ship, theme park, and resort expansions and other new guest offerings at Walt Disney World Resort and Hong Kong Disneyland Resort, and the development of Shanghai Disney Resort.”
That increase in capital spending took free cash flow down to $3.4 billion in fiscal 2011, from $4.5 billion in fiscal 2010.
But the increase in capital spending is projected to be much smaller in fiscal 2012, climbing by just $500 million instead of $1.5 billion year-to-year. (Most of that will go to spending on the Shanghai park. Disney is actually only funding a share of the capital spending for the park—about 40%—with the rest coming from the Chinese government.)
I think free cash flow could surpass 2010’s $4.5 billion and reach $5 billion in fiscal 2013.
And that suggests that the 50% dividend increase in 2011, after a 14% dividend increase in 2010, could be just the beginning of a period when Disney distributes more cash to shareholders.
But there’s another advantage to the coming end of Disney’s capital-spending cycle: It means that it will take less in sales growth to produce more in earnings growth, since less capital spending will come off the top-line revenue figures on their way to bottom-line profit.
Wall Street’s estimates for Disney’s revenue growth are a modest 6.6% in fiscal 2012 and just 5.3% in fiscal 2013. And that translates into modest projections for earnings growth of 13.7% in fiscal 2012 and 14.8% in fiscal 2013.
I like the modesty of those numbers, since even that relatively small growth rate gets me to a target price of $45 a share by December 2012. That’s a 22.6% gain from the $36.70 price at 3:15 p.m. New York time on December 2. (And don’t forget the 1.6% dividend yield.)
And deceleration in capital spending in fiscal 2012 and a (probable) drop in capital spending in fiscal 2013 gives me a margin of safety that I deeply appreciate in the current global economy.
Disney has the possibility of growing earnings faster than expected, because of those trends in capital spending if revenue growth meets projections, even with some margin of error from the capital spending trend if revenue growth is weaker than expected.
(Disney’s timing in the China market also works to reduce risk, I believe. The Shanghai park isn’t scheduled to open until 2015, so it will escape any near-term slowdown in China’s economy.
(And the Hong Kong park, which has experienced disappointing revenue amidst criticism that it’s too small, has just now launched the first installment of an expansion that will increase the size of the world’s smallest Disneyland by 23%. Toy Storyland opened on November 17, with Grizzly Gulch and Mystic Point set to open in 2012 and 2013. The newness of these features should keep attendance high even if the economy slows.)
I wouldn’t mind getting these shares on any weakness, but the current price marks an attractive entry. And the dividend does have a record date of December 16.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares in Walt Disney as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.
