The Walt Disney Company (NYSE:DIS) is a multinational media and entertainment conglomerate, famously known for their theme parks, film studios, and most recently for their streaming service. The company was founded in 1923 by the Disney Brothers and has expanded into a global power and a popular stock, with their latest market capitalization reaching $315 billion.
Disney shares have seen tremendous growth in the last 5 years but experienced a sharp pull-back down to ~$85 in March 2020 during the first COVID wave. As vaccination programmes progressed and restrictions were eased, shares then rebounded and reached an all-time high of ~$200 in March 2021. Since then, the price has pulled back slightly to ~$180 due to the Delta variant concerns that have emerged this summer. Disney and other leisure related stocks have outperformed this year thanks to the effects of the economic reopening and here is why we think the rally will continue:
Return of theme parks and cruises
The impact of COVID lockdowns had a large impact on Disney’s theme parks and associated products. This part of the firm’s revenue accounted for nearly 40% of company-wide revenues in fiscal year 2019. The disruption to this key area significantly impacted the bottom line and share price in 2020. As a return to normality progresses, especially in key regions such as Florida and California, Disney’s outlook continues to improve. With the share price already sitting relatively close to all-time highs despite this gap in their traditional revenue mix, we believe there is further bullish potential.
Whilst the traditional side of the business struggled, Disney has benefitted enormously from the opportune launch and expansion of their streaming and video-on-demand services, most notably with Disney+. The service, which includes content from Marvel, Pixar, and Star Wars, was launched in late 2019 and has already reached a total of 116 million subscriptions, becoming a serious competitor for Netflix. There is still room for significant geographical expansion, particularly in Asia and Latin America.
After the halt in movie production and distribution due to COVID, there is a large backlog of movies and TV series that are in the pipeline to be released and boost sales. Disney earned $125 million from the release of Black Widow alone.
Return of dividends
Before the pandemic, Disney was a strong income stock, with a dividend payout ratio between 20-30% in the fiscal years 2015-2019. The ratio is the proportion of company earnings paid out as dividends to shareholders on an annual basis.
In 2020 the company prudently decided to temporarily suspend its dividend payment to better protect itself from the financial impact of drawn-out lockdowns. As financial results have improved significantly, most recently in the latest Q3 results which included a year-on-year revenue jump of 45% and a cash stockpile of ~$16B on the balance sheet, the management team have confirmed their commitment to resume paying dividends soon.
We believe Disney shares are demonstrating an attractive mix of growth and income stock characteristics, which should continue to be bullish in upcoming quarters.