Key Things to Consider Before Buying The Walt Disney Company (NYSE:DIS) for Its Dividend

Is The Walt Disney Company (NYSE:DIS) a good dividend stock? How can we know? Companies that pay dividends and grow earnings can be very rewarding in the long run. Yet sometimes investors buy a popular dividend stock because of its yield, then lose money if the company’s dividend doesn’t live up to expectations.

A 1.2% yield is hard to anticipate, but the long payment history is respectable. At the right price, or with strong growth opportunities, Walt Disney could have potential. A simple analysis can reduce the risk of owning Walt Disney for its dividend, and we’ll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Walt Disney!

Distribution rate

Companies (usually) pay dividends on their profits. If a company pays out more than it earns, the dividend may need to be cut. So we need to determine whether a company’s dividend is sustainable relative to its net income after taxes. Last year, Walt Disney paid out 31% of its profits as dividends. An average payout ratio strikes a good balance between paying dividends and keeping enough cash to invest in the company. Additionally, it is possible to increase the payout ratio over time.

Another important check we perform is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 263%, Walt Disney’s dividend payments are poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded either by cash in the bank or borrowing, which is not desirable in the long term. Although Walt Disney’s dividends were covered by the company’s reported earnings, free cash flow is a bit larger, so it’s not nice to see that the company didn’t generate enough cash to pay its dividend. If it were to repeatedly pay dividends that were not well covered by cash flow, this could pose a risk to Walt Disney’s ability to maintain its dividend.

Is Walt Disney’s balance sheet risky?

Since Walt Disney has a lot of debt, we need to check its balance sheet to see if the company might be at risk of debt. A quick check of its financial position can be done with two ratios: net debt divided by EBITDA (earnings before interest, taxes, depreciation, and amortization) and net interest coverage. Net debt to EBITDA is a measure of a company’s total debt. Net interest coverage measures the ability to meet interest payments. Essentially, we are checking to see if a) the company is not overly leveraged and b) it can afford to pay the interest. Walt Disney has net debt equal to 2.56 times its EBITDA. Using debt can accelerate business growth, but it also increases risk.

Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Walt Disney has an EBIT of 9.64 times its interest expense, which we think is adequate.

Consider getting our latest analysis on Walt Disney’s financial situation here.

Dividend Volatility

From the perspective of an income investor who wants to collect dividends for many years, there is no point in buying a stock if its dividend is regularly cut or is unreliable. Walt Disney has been paying dividends for a long time, but for the purposes of this analysis, we are only looking at the last 10 years of payments. The dividend has remained stable over the last 10 years, which is great. We think this may suggest some resilience in the company and its dividend. Over the last ten years, the first annual payment was $0.35 in 2010, compared to $1.76 last year. Dividends per share have increased by about 18% per year over that period.

It’s rare to find a company that has increased its dividend rapidly over ten years without taking any significant cuts, but Walt Disney has done just that, which we really appreciate.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Earnings have grown by around 5.5% per year over the last five years, which is better than seeing them shrink! Earnings per share have been growing at a credible rate. Furthermore, the payout ratio is reasonable and provides some protection for the dividend, or even the potential to increase it.

Conclusion

When we look at a dividend stock, we need to determine whether the dividend will grow, whether the company is able to maintain it under a wide range of economic circumstances, and whether the dividend payment is sustainable. First, we like Walt Disney’s low dividend payout ratio, although we’re a little concerned that it paid out a much higher percentage of its free cash flow. Earnings growth has been limited, but we like that dividend payments have been fairly consistent. Ultimately, Walt Disney doesn’t meet our dividend analysis. It’s not that we think it’s a bad company, just that this analysis probably presents more attractive dividend prospects.

Companies that grow their profits tend to be the best dividend stocks over the long term. Check out what the 27 analysts we track are forecasting for Walt Disney free with public analysts’ estimates for the company.

Looking for more high-yield dividend ideas? Try our list of dividend stocks yielding over 3%.

If you spot an error that needs to be corrected, please contact the editor at [email protected]. This Simply Wall St article is general in nature. It is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. Simply Wall St has no position in any stock mentioned.

Our goal is to provide you with long-term, focused research analysis based on fundamental data. Please note that our analysis may not factor in the latest price-sensitive company announcements or qualitative information. Thank you for reading.