By: Dividend Sensei
Risks To Consider
While Disney is a low risk blue chip there are three challenges the company will need to address in the future.
The first is the mammoth Fox acquisition.Integrating Fox is going to be a challenge, which is why Bob Iger is postponing his retirement yet again (third time). But more potentially worrisome to income investors is the large amount of debt that Disney will need to take on to close that deal.
While we won’t know the final breakdown of the deal until the end of the year, most likely Disney’s debt will increase by $35.5 billion to fund the cash portion of the acquisition. In addition Fox has $13 billion in debt that Disney will assume. And if Fox wins its bid for the remaining 61% of Sky (Comcast is bidding $31 billion) then that debt load could rise much higher.
While Disney’s strong balance sheet will easily be able to support the added debt (likely without a credit downgrade) the company will have to make deleveraging a top priority. That means that it will have to maintain a low FCF payout ratio to use most of its free cash flow to repay debt quickly. The result might be several years of slower than expected dividend growth.
The second risk is execution on streaming. Bob Iger has said that the Disney streaming service will cost significantly less than Netflix, because it will focus on higher quality content, but a smaller volume of it. The trouble for Disney, and all streaming providers, is that while the market potential is enormous, it takes incredible scale to make a profit.
For example Hulu, even with over 17 million subscribers, is still generating losses. And according to analysts at UBS, if Disney were to charge $8.99 per month for its streaming service it would need 32 million subscribers to offset the lost $2.6 billion in third party licensing agreements it would be giving up. The figure is so high because UBS estimates that Disney’s operating costs to run the service would come in at $806 million. The bottom line is that while Disney’s massive content library and exclusive content it’s developing for its service (live action Star Wars TV show) mean its streaming business is likely to grow fast. But it probably won’t be accretive to the company’s bottom line for many years to come.
Finally there’s Bob Iger’s eventual retirement to consider. In June 2021 we have to assume that he will be leaving, once the Fox purchase is fully integrated into Disney’s empire. Analysts believe the two most likely CEO replacements are:
- Kevin Mayer, former chief strategy officer and now head of the newly created direct-to-consumer segment (streaming division)
- Bob Chapek, the head of the combined parks & resorts and consumer products segment
While both executives have proven themselves very talented at their niches within the company, only time will tell if either man can overseas the entertainment empire that Iger has built over what will be his 16 year tenure as CEO.
Bottom Line: Disney Is A Great Buy And Hold Forever Dividend Growth Investment At This Price
When it comes to media and entertainment, few can rival Disney in terms of its massive content library, global reach, or incredible ability to monetize its brands across several platforms. The Fox acquisition, which is expected to close by the end of the year, will only further cement Disney as the world’s media king.
And despite numerous challenges that lie ahead, I’m confident that the money minting machine that is Disney will prove itself more than capable of delivering double digit earnings, dividend growth, and market beating returns for the next several decades. With shares now about 10% undervalued, today is a great time to add this buy and hold forever dividend growth dream stock to your portfolio.