Disney (DIS -0.02%) conjures up warm memories for many people. Upon hearing the name, you may think about its heart-warming movies or visits to theme parks.
It's hard for some to imagine, but Disney has become a vast media empire. Its businesses span television networks, streaming services, production studios, theme parks, cruises, and retail operations, among others.
But not everyone was happy with Disney's direction and financial results. Activist investor Trian Partners attempted to gain seats on the board of directors. Evidently, most investors like the way things are going since they rejected Trian's two nominees and kept the current board intact. With that issue seemingly behind it, management can fully concentrate on improving Disney's business.
The stock has gained nearly 11% since the start of the year, trailing the S&P 500's 14%. Can investors expect the shares to beat the market over the long haul or does the share price reflect too much optimism?
Image source: Getty Images.
Some progress
Bob Iger returned as Disney's CEO in late 2022, and shortly thereafter, he set out an ambitious agenda to improve the company's profitability. This includes cost cutting (including producing less content), achieving streaming profitability, and restoring the dividend.
Management has made progress. The streaming business, including ESPN, lost $18 million in the latest fiscal quarter (ended on March 30), much narrower than the $659 million loss a year ago.
Looking behind the numbers, there was mixed news, however. There were modest subscriber gains at various services. But average monthly revenue per paid subscriber, a key top-line measure that includes fees and advertising, fell at the domestic Disney+ business despite higher prices. Hence, it looks like management has more work to do to achieve long-term health in this competitive business that includes heavyweights like Netflix.
Disney's entire business had a tepid 1.4% revenue increase. However, adjusted earnings per share, helped by cost-cutting, jumped more than 30% $1.21.
Keeping an eye on succession
Disney brought Iger back after he stepped aside in 2020. It came after his handpicked successor, Bob Chapek, lost investors' and the board's confidence. The shares lost nearly 30% during his tenure.
After extending his planned time at the company, Iger's contract expires in 2026. He has stated that he plans to retire at that time. Investors have witnessed what can happen when a succession isn't handled properly. With discussions happening behind closed doors, it's impossible to know whether this process will work out better. However, not getting the right person is certainly a risk for investors.
The decision
The board of directors and management kept their promise and reinstated the dividend. It will pay $0.45 in July, up from December's 0.30 payout. Nonetheless, with a 0.9% dividend yield, income-oriented investors can find better alternatives.
Does Disney offer investors appreciation potential? The stock may have gotten ahead of itself, especially given the lackluster revenue growth and risk that any future CEO will fail to create value for shareholders. The shares recently had a price-to-sales (P/S) ratio of 2.1, higher than the 1.9 multiple at the end of 2023, and sell at a higher multiple than the S&P 500's 1.7.
Unless you see revenue growth accelerating, I'd say the ship has sailed right now for buying Disney shares.
