Disney (DIS +2.30%) recently brought back a familiar friend as longtime CEO Bob Iger came out of retirement and returned to his former role. He plans to do something similar for shareholders by reinstating a dividend later this year. That's a big deal, even for investors who don't really care about collecting dividend income.
Here's why Disney's decision to bring back the dividend is a potential catalyst investors won't want to overlook.
NYSE: DIS
Key Data Points
The details on Disney's dividend
Like many companies, Disney had to suspend its dividend during the pandemic to conserve cash due to its impact on its business. While many of those companies have since resumed paying dividends, Disney kept its payout on ice while working through the pandemic's lingering impact and making heavy investments in streaming. However, that's about to change.
In his first quarterly conference call since returning to the company, Iger stated:
Now that the pandemic's impacts to our business are largely behind us, we intend to ask the board to approve the reinstatement of a dividend by the end of the calendar year. Our cost-cutting initiatives will make this possible. And while initially, it will be a modest dividend, we hope to build upon it over time.
CFO Christine McCarthy provided more commentary on the future payout later on the call. She stated: "given our recovery from the pandemic, strong balance sheet, and commitment to cost cutting, we believe we'll be on track to declare a modest dividend by the end of this calendar year. The amount will likely be a small fraction of our pre-COVID dividend with the intention to increase it over time as our earnings power grows."
Why Disney's dividend is a big deal
Disney's future dividend might underwhelm income-focused investors. Iger and McCarthy said it would be a modest payout, with the CFO suggesting it would be a fraction of its prior level (Disney made semi-annual dividend payments of $0.88 per share or $1.76 per year). As such, Disney will likely offer an unappealing dividend yield (for perspective, a fully reinstated rate would yield 1.8% at the current stock price versus 1.7% for the S&P 500).
However, the size of the dividend doesn't matter. What matters is that Disney is initiating a payment that it intends to grow. That's because the data shows that dividend initiators and growers have historically delivered superior returns:
|
Dividend status |
Average annual total return |
|---|---|
|
Dividend Growers & Initiators |
10.2% |
|
Dividend Payers |
9.2% |
|
Equal-Weight S&P 500 Index |
7.7% |
|
No Change in Dividend Policy |
6.6% |
|
Dividend Cutters & Eliminators |
4% |
|
Dividend Non-Payers |
-0.6% |
Data source: Ned Davis Research and Hartford Funds. NOTE: Returns data from 1973 to 2022.
Before the pandemic, Disney was a dividend growth stock. It steadily increased its payout during Bob Iger's term as CEO. Unsurprisingly, its stock outperformed:
Image source: Disney Investor Relations Presentation.
However, since announcing the suspension of its dividend in May 2020, Disney's stock has woefully underperformed the market. Overall, shares have declined by about 4% (a negative 1.5% average annual total return) against a more than 45% total return for the S&P 500 (13.7% annualized).
That's not to say Disney will magically start outperforming once it reinstates the dividend. However, history suggests that companies that grow their payouts (because their earnings are rising to support a higher payment level) tend to outperform dividend cutters, non-payers, and non-growers. In Disney's case, it aims to pay a growing dividend supported, as McCarthy notes, "as our earnings power grows." That combination of earnings and dividend growth could give Disney's stock the power to outperform over the longer term.
An important driver of total returns
Disney had to suspend its dividend during the pandemic to conserve cash. However, the company's returns have significantly lagged behind the broader market since then, which isn't surprising since that's often the case for non-dividend-paying stocks.
That's why the company's revelation that it plans to bring back the shareholder payout later this year is such a big deal. Companies that pay a growing dividend have historically outperformed (as Disney showcased during Iger's tenure). The company's dividend resumption is therefore a potentially significant catalyst that investors won't want to overlook.
