Every penny counts
Dan Loeb is working some sorcery on Walt Disney. The activist is calling on the Magic Kingdom to permanently axe the dividend and spend more on its fast-growing streaming service. It’s an easy ask that can make an impact.
Loeb’s Third Point, which owns less than 1% of the $222 billion media giant, sent a letter on Wednesday to boss Bob Chapek praising the company for its “creativity, bold vision and prescient grasp of the future of entertainment.” It’s a far cry from the cage-rattling of Loeb’s fellow activists who typically choose to needle their targets’ weaknesses.
Loeb is suggesting that Chapek keep the dividend on ice permanently and plow the $3 billion spent annually instead on content production for Disney+. The company suspended the payout in May because of the challenges it faces in the pandemic, especially related to its theme parks, which had an operating loss of $2 billion in the quarter ending June 27.
The streaming service however has seen rocket-like growth during global lockdowns. All told, Disney now has around 100 million subscribers to its flagship, Hulu and ESPN+, astronomical expansion considering it only launched in November. That’s almost half of Netflix’s global customer base.
Cash requirements abound if it wants the growth to continue. Content rights related to sports like the National Football League are particularly expensive. The company is on the hook for some $44 billion in off balance sheet sports programming commitments, according to the latest annual filing. Netflix’s streaming content obligations tally $19 billion.
Disney’s dividend yield at a hair over 1% is peanuts compared to media companies, which are typically more than three times as much. So giving it up isn’t a big sacrifice for shareholders. But the payoff can be huge. By Loeb’s reckoning Disney’s current customer is worth more than $100 each. For example, the company spent $75 million for “Hamilton” and netted an estimated 2 million subscribers. That represents $200 million in customer value by Loeb’s math just for one Broadway show.
Netflix doesn’t pay a dividend but it eats Disney’s lunch in total shareholder return. Over the past three years the company led by Reed Hastings had an annualized return of 39% compared to Disney’s 7%. Reinvesting the money back in the business is a little like pixie dust.