The Disney Dividend Hike Could Have Been Much More

Disney is the only one of the 30 Dow Jones Industrial Average (DJIA) components that still has the old-fashioned strategy of paying its dividend annually. We would have loved to see this change to quarterly payments, but the focus for now is simply on how much the dividend was raised and what it should have been raised to.

Disney has a real problem here going forward, although this problem actually has been a good problem to have for its shareholders who have been holding shares over the long haul. This problem is that Bob Iger’s strategy is working handily, and Disney’s share price gains keep the dividend yield very low. Disney shares are around $70.50 and within 2% of its all-time high.

Disney shares are up 41% so far in 2013, so its current dividend yield was only a paltry 1.06%. The new yield for investors who buy in now will only be 1.21%. You would think a DJIA stock would be far better with a dividend yield for its holders, but its share performance has kept that yield low. At the start of the year, that yield was 1.5%, and the average yield of the Dogs of the Dow looks like it will be close to 3.5%.

Disney has been aggressive with cash acquisitions, such as the Star Wars franchise for a very cheap $4 billion to secure the next $30 billion to $50 billion franchise sales over the next generation. We just think that a 22% payout rate of normalized income from operations is too low. Many DJIA stocks are well into the 30% payout rate, some are closer to a 40% income payout ratio, and some are far higher.

Disney’s dividend hikes have been aggressive in the past two years, and a 15% hike just does not look all that impressive when you consider a low payout ratio and the low nominal yield. The annual payout was raised by 25% last year to $0.75 per share, but the hike the prior year was a sharp 50% rise to $0.60. The prior hike was only to $0.40 per share from $0.35.

The $70.50 price is actually up on the day, but we are not evaluating the dividend on a one-day reaction. The 52-week range is $48.55 to $71.69.

We were hoping that Disney would raise that dividend up to $0.95 or even $1.00 per share. We also wanted to see the annual payout move to a quarterly payout. Disney’s stock prospects remain attractive long-term, but aggressive dividend investors may want to look elsewhere. Value investors may not be too eager to pay 18 times expected 2014 earnings, even if that is closer to 15 times for expected 2015 earnings.