The Walt Disney Company (NYSE:DIS) stock is about to trade ex-dividend in 2 days time. Investors can purchase shares before the 13th of December in order to be eligible for this dividend, which will be paid on the 16th of January.
Walt Disney's next dividend payment will be US$0.88 per share, on the back of last year when the company paid a total of US$1.76 to shareholders. Based on the last year's worth of payments, Walt Disney stock has a trailing yield of around 1.2% on the current share price of $146.21. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Walt Disney can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see Walt Disney paying out a modest 28% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Walt Disney paid out more free cash flow than it generated - 167%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
While Walt Disney's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Walt Disney to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Walt Disney earnings per share are up 7.9% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Walt Disney has delivered an average of 18% per year annual increase in its dividend, based on the past ten years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is Walt Disney worth buying for its dividend? Walt Disney delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 167% of its cash flow over the last year, which is a mediocre outcome. In summary, while it has some positive characteristics, we're not inclined to race out and buy Walt Disney today.
Ever wonder what the future holds for Walt Disney? See what the 23 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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