The Pros And Cons Of A Disney Dividend Cut

Walt Disney Co DIS shares jumped 5% on Tuesday after the company announced a major restructuring and said it's planning to go all-in on its Disney+ streaming service.

Roughly a week after activist investor Dan Loeb called on Disney to end its $3 billion annual dividend and invest that money in more streaming content, Disney CEO Bob Chapek said the company is exploring all options, including potential changes to the dividend.

Disney investors clearly liked what they heard from Chapek, but a potential dividend cut is far from a no-brainer. On Tuesday, DataTrek Research co-founder Nicholas Colas weighed the pros and cons of a Disney dividend cut.

See Also: Disney's Stock Pops After Company Doubles Down On Streaming

Pros Versus Cons: Colas listed three major pros of cutting or eliminating the dividend:

  • A dividend cut is a better, self-funded alternative to streaming investment than adding debt to an already deteriorating balance sheet.
  • Disney’s outstanding long-term track record of content creation suggests the money would be invested wisely.
  • A dividend cut could help shift the investment narrative away from when theme parks and movie theaters will reopen to when Disney’s next major streaming show or movie is dropping.

Colas also discussed three cons to a dividend cut:

  • A dividend cut may highlight just how much the company’s sustainable free cash flow has shrunk. Colas speculates it could even be less than $1 billion annually at this point.
  • Disney going all-in on streaming ramps up the risk for the stock and the company if the streaming growth path hits any bumps in the road.
  • Throwing money at a problem doesn't guarantee success, and Disney will continue to face execution risk as it attempts to take on streaming market leader Netflix, Inc. NFLX.

Long-Term Outlook: Regardless of what Disney ultimately decides about the fate of its dividend, Colas said the S&P 500's current dividend yield of 1.67% is likely headed lower in the long-term given the advantages of investing in disruption over returning cash to shareholders.

“At the margin, we think there’s enough of an argument here to expect declining dividend payout ratios over the next decade. And that will be a positive for equities generally if and when it occurs,” Colas said.

Benzinga’s Take: The fact that disruptive stocks have left dividend stocks in the dust since the financial crisis in 2008 supports the idea that shareholders would be happier in the long-term if Disney diverts its cash flow away from dividends and toward Disney+.

Given historically low interest rates are likely to remain in place through at least 2023, investors expect a lot more from their investments these days than the 1.3% annual yield that Disney is currently paying.

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