Disney Stock Has Some Upside With a Bigger Dividend

Disney (NYSE:DIS) is likely to reach new highs once its earnings come out after the market closes on Feb. 11. DIS stock is down 3% year-to-date, but this downdraft could easily turn around after the earnings release.

The main reason is investors will see how powerful its over-the-top (OTT) streaming subscription services have become. For example, with 120 million subscribers the company is now the second-largest OTT subscription-based entertainment provide after Netflix (NASDAQ:NFLX). This includes Disney+ (which has been a huge success since it started last year, Hulu and ESPN).

Moreover, I believe Disney could announce a hike in their dividend per share. This is because it typically has jacked up the dividend more than once in 12 months.

Disney has not paid a dividend in the past year. The company previously cited Covid-19 (with little explanation as to why) and its desire to focus on direct-to-consumer (DTC) initiatives.  I believe at some point during 2021 they will relinquish and decide to pay the dividend again.

Moreover, as one analyst points out in Seeking Alpha, the company’s theme parks, a quarter of their revenues, should begin to reopen and normalize over the next year. This will act as another positive catalyst for DIS stock as those revenues return. Its parks are the largest theme and experience parks in the world and are hard to replicate. In the past, they have attracted 155 million visitors, with high prices. This is two-and-half times the next highest similar park system.

What Analysts Expect

Analysts are forecasting another loss of 38 cents per share on revenue of $15.8 billion. Last quarter Disney lost just 20 cents on lower revenue of $14.7 billion.

However, for the rest of the year, analysts expect earnings will turn around quite rapidly. For example, analysts surveyed by Yahoo! Finance have average earnings per share (EPS) estimate of $1.63 for the fiscal ending Sept 30.  This rises to $4.77 for the following fiscal year.

This puts DIS stock on a reasonable price-earnings (P/E) multiple of just 35x. However, this is still a good deal higher than the company’s historical forward P/E ratio. For example, Morningstar reports that its average forward P/E over the past five years has been 23.8x.

Nevertheless, analysts foresee EPS hitting $6.22 in the year ending September 2023 and $7.07 by September 2024. This puts DIS stock 27x 2023 earnings and 23.8x 2024 earnings.

What The Dividend Restoration Could Do

In other words, the company is on a recovery path to its normalized valuation. But here is the thing that could push it higher: dividends.

For example, let’s say Disney restores the dividend and pays a higher one. It usually increases the dividend per share by four to six cents per quarter. The last dividend was 88 cents per share. That is $3.52 annually.

Assuming it raises the dividend by 10% or 9 cents, the new annual dividend would be $3.88 per share. Therefore, if the market gives the stock a 2% dividend yield, the price would be $194 per share.

And that is just if the dividend rises. Assuming there is other good news from the OTT subscription services, DIS stock could easily move much higher. This is because analysts would bring forward their earnings recovery scenarios.

What To Do With DIS Stock

Unless the U.S. and the world are going to head into a recession, there is a good likelihood that Disney is on a path to recovery. The only issue is how long it will take to occur. The upcoming earnings release will help analysts gauge how fast and how on track the company is for this recovery.

I suspect that, although the company claims it needs to withhold paying the dividend, this will not last long. The company has a large institutional shareholder base that normally expects this as a part of their expected returns on the stock. As the recovery ensues, it will put pressure on the company to pay the dividend.

Investors will carefully analyze what the company says about a dividend restoration in the upcoming earnings release and conference call. Moreover, any higher-than-expected uptick in the OTT subscription growth rate could be positive for the stock. In addition, any indication that theme parks will reopen will also move DIS stock higher.

In the meantime, it looks like the base value for the stock is close to $194 per share, or 10% higher than its present price.

On the date of publication, Mark R. Hake did not hold a long or short position (either directly or indirectly) in any of the stocks in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.