Disney: Dividend Growth Story A Buy After Today's Dip

Walt Disney Co. (DIS) recently reported its earnings for the fourth quarter, and for the fiscal year 2012. Both quarterly and full year earnings per share increased, by 17% and 24%, respectively, over the respective prior periods, in line with consensus estimates. However, the stock is down 6% in early trading, largely due to the revenue miss. Even though growth was seen in revenue on both a quarterly and a yearly basis, the 3% improvement in quarterly revenue was below expectations, causing the dip in shares. The weak commentary for the next quarter's ad revenues was also a reason for the drop in share price. We think this dip is an ideal opportunity to grab the shares. Currently, the company has a very low dividend payout ratio (20%) and as cash flows grow in the future, its distributions to shareholders will improve too. Disney has done a lot of investments in the past and now is the time to reap the benefits of these investments. Sell side is of the opinion that the company is transforming from an investment phase into a growth phase. If anything, this transformation will give the company excess cash to return to its shareholders. We are expecting DIS's dividend yield to increase in coming quarters.

DIS is trading at 12 times its forward earnings, at par with Time Warner Inc.'s forward multiple of 12x and at a slight discount to News Corp's (NWSA) at 12.3x. The stock is down 12% from its 52-week high of $53.40, largely due to the recent downward move after the earnings release. However, we believe that despite the slight revenue miss, the company had a good year in terms of revenue and bottom line growth. Its media and park segments will continue to bring growth, as the company has made investments in resort projects and cruise ships that are beginning to payoff. Moreover, the recent acquisition of Lucasfilm can be identified as another key catalyst. With a 1.2% yield, the stock remains attractive from a dividend standpoint. Read more