There are two things that Disney (DIS) has done exceptionally well over the years in my view. The first is unlocking value from its vault of unique content and franchises, something which has increased Disney’s underlying profitability enormously under CEO Bob Iger. The second thing that Disney has nailed over that time is, well, growth.
On that second point, the figures are actually pretty astonishing. The combined five-year income growth rate for the segments excluding Media Networks – i.e. just looking at the parks and resorts, all the consumer products from Disney stores, the profits from cinema releases like the new Star Wars movies, and so on – is at 20% per annum. Anyway, when you add those two points together, you won’t be surprised to learn that Disney has delivered substantial riches to its shareholders over the past couple of decades.
On that note, let’s go ahead and look at some numbers. We start in the summer of 1996, when the stock traded for around $20 per share on a split-adjusted basis. The company had pulled in roughly $12b worth of revenue ($5.67 per share) in the year before, of which $1.4b (86¢ per share) hit the bottom line as net income. As a potential investor back then, that means you saw the stock trade at roughly 23x its prior-year profit per share.
Now, you knew that those earnings were high quality, and by reading the annual report you saw that the company had a library of hundreds of films. That was backed up by theme parks, Disney stores and then diversified by its various media networks. In addition, the company had paid out a dividend of 12¢ per share to stockholders in 1995. That figure was 20% higher than in 1994, and had increased by 20% per annum on average since 1992. Things looked pretty good.
What else did you note? Well, you thought that a price-to-earnings ratio of 23 and a dividend yield of 0.6% was a bit expensive. However, given the quality of those earnings, not to mention the likelihood that they will continue to grow in the future, you decided to buy 500 shares of Disney stock (split-adjusted figure) by enrolling in the company’s stock purchase plan. You sent off the order form to Disney’s registrar, along with a check for $10k. Finally, you ticked the box that tells them to send you a check whenever the company pays out its dividend. You figured it was wise to hedge your bets by not reinvesting your dividends into more stock.
Here’s what happened next. Every year the company mailed out its annual report and you saw for yourself that profits kept rolling in. For that reason, you never felt the need to check up on how your investment was doing. The stock price varied from one year to the next, but you were content because Disney never once stopped churning out those high quality profits. The only thing you did was dutifully cash those dividend checks.
Twenty years roll by. That $5.87 per share in annual revenue that Disney generated back in 1995 has grown to $30.69 per share. Likewise, net profit now stands at around $4.90 per share. You figure it has been a sufficiently long time, and so decide to check up on your investment. The first thing you see is that the initial $10k investment is now worth $47.9k. In addition, the company has retired 19% of its outstanding shares over those years, thereby substantially increasing the relative size of your ownership.
What else can we say here? Well, the 14¢ per share dividend in 1996 has grown at an annual rate of 11% on average. It was worth circa $1.15 per share last year. When you add up all those dividend checks over the years, they come to a cumulative total of $3,625. Next year, you would be looking at a yield on cost of 6%, quite low after twenty years because of Disney’s historically low dividend yield and relatively high valuation. Between 1999 and 2004, the average annual PE ratio never dropped below 20. Indeed, it averaged well over 30 in each year between 1999 and 2002.
Let’s assume that rather than collect that dividend cash you ticked the other box on the enrollment form. That was the one that instructed the company to reinvest dividends into more Disney stock instead. In that scenario, your initial 500 Disney shares would have increased to a total of about 700 shares today. The stock is currently trading around the $95 mark, giving your investment a current value of $67k. That is equivalent to an average annual return of 10%. Assuming the 2016 dividend grows in-line with expectations, you would be looking at income of over $1k for the year.
Now, the valuation multiple has come down in more recent years. I mean, Disney stock spent the year at an average annual PE ratio of just 12.5 in the chaos of 2009. It was a once in a generation entry point that has returned 27.5% per annum in the seven years since. The decline in subscribers to flagship sports network ESPN, which is responsible for just under half of Disney’s profits, has also caused the shares to retreat from their all time 2015 highs. The stock currently trades for somewhere in the region of 16x expected annual earnings. For a company with such an enduring legacy of wealth creation, it would take a brave individual to bet that those shares won’t be worth significantly more in the decades to come.
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