The Case for Walt Disney as a Stock to Own for the Next Decade
Picking a stock that is safe to own for a full decade is no simple task. After all, there are recessions, rapidly changing consumer habits, wages and operating costs, other business disruptors, and even laws and taxes that have to be considered. There also are even wars, military actions and other geopolitical risks that have to be factored into a decade-long evaluation. 24/7 Wall St. has tracked companies that are safe enough for most investors to want to own for the next decade.
To qualify as a stock to own for a decade or more, they must have solid earnings histories, they have to be paying dividends or are about to embark on a dividend strategy, and they must have business models that can adapt to and withstand the tests of time. That includes being able to remain profitable even during economic slowdowns and traditional recessions.
Walt Disney Co. (NYSE: DIS) was first selected by 23/7 Wall St. as one of 10 stocks to own for the next decade back in late 2010. The economy was still just starting to recover from the Great Recession. National unemployment was over 9% and nominal gross domestic product was about $15 trillion. Zoom forward to 2019, the stock market has turned into the strongest bull market anyone that is still alive has seen. And in 2019, unemployment is under 4% and GDP is over $21 trillion.
The question to ask now is if Disney is a stock that should be owned for the next decade. Before just assuming “yes” because of strength or just assuming “no” because the stock has risen so much, it’s important to understand that the Disney heading into 2020 is a vastly different company with a vastly different economic opportunity for the next 10 years.
In 2010, Disney was a leader in media and entertainment with a vast movie library and movie studios. It had major merchandising, theme parks and vacation destinations, cruises, ESPN, Marvel, Pixar and ABC. That’s still true, but now Disney owns Star Wars, which will have altered Disney’s opportunities when coupled with the power of Marvel and Pixar. ESPN went from a hero to being a dud, and now it also is likely to be viewed favorably now that Disney is launching its own streaming service for cord-cutters and cable subscribers alike. Disney can also count the massive $70-plus billion Fox acquisition that assured its position as a media powerhouse for the years and decades ahead.
What else has changed is that Disney has had to take on massive long-term debt to fund that solid buyout. Its share price has risen handily since that deal closed, but debt can be a bad thing in a recession or slower economic time. It also can be crippling if a company has to refinance that debt in the years ahead when interest rates could be higher and investors may demand a higher spread. Disney’s long-term debt was $17.2 billion and its “other liabilities” in long-term obligations was $9.6 billion at the end of 2018. At the end of the first quarter, Disney’s long-term debt was $37.8 billion and its “other liabilities” was $26.7 billion. This took a company with $44 billion in total liabilities up to $109 billion in one rapid swoop.
Back in 2010, Disney paid a dividend yield of only 0.9%. We argued that it was far too low, but the share appreciation still puts that yield at only about 1.25%. Despite the dividend rising 300% in total annualized payouts, Disney’s share price of about $37 in late 2010 (unadjusted for dividend payments) has risen to $140 in summer 2019.
Another difference between 2010 and heading into 2020 is that Chair and CEO Bob Iger is now much closer to retirement. His pay has been a topic of discussion, but Iger has made some great acquisitions and investments and he has positioned the company for future decades. Whoever assumes that role in the coming years likely will know at least a little bit how Tim Cook feels as the replacement for Steve Jobs.
Disney also ranks high in the EGS investing field that has become much more of a focus heading into 2020 than back in 2010. The stock is highly ranked in all the indexes and exchange-traded funds tracking environmental, social and governance (ESG) themes. Disney also may get to use some of its capital from the forced sale of regional sports networks as part of a regulatory agreement under the Fox deal to pay down debt. On top of Star Wars already having offshoots and its own theme park, Marvel’s Avengers has become the most valuable movie franchise going. Disney is now the super-majority owner of Hulu too. All this is going to make the Disney+ streaming service a hit and must-own service for families.
Generating a return of 15% in 2018 was far better than the 6% return that analysts had projected at the start of that year. Disney entered 2019 trading at about $110, and Wall Street analysts had a consensus price target of just $124.50 at the start of this year. Disney has now risen above $140 per share, with a 30% year-to-date gain that is 10 percentage points higher than the S&P 500’s gain, and analysts now have a Refinitiv price target closer to $151.
In July, JPMorgan has told its clients to buy Disney shares ahead of the early August earnings report. The firm’s rating is Overweight and its target price is $150. Many other analysts have jumped firmly on the Disney train. Earlier this year, Merrill Lynch’s price objective jumped up to a $168, and the firm even laid out a scenario where Disney could rise closer to $200 per share.
Disney now is worth more than $250 billion in market cap. It’s taken decades to build to that level. One very strong case is the coming war with Netflix Inc. (NASDAQ: NFLX). Disney is taking all of its Disney, Star Wars and Marvel content off of Netflix very soon. Even after a poor earnings and subscriber report, Netflix has a market capitalization of $140 billion. The market is never likely to assign the same multiple on earnings or revenues that it has for Netflix, but Disney+ is being priced far lower than Netflix and its new content powerhouse is close to a sure thing that households will subscribe to. Even valuing the future streaming at one-third of the Netflix value would be a major win for Disney (and probably bad for Netflix).
If Disney can work down some of its debt, even if it comes at the expense of growing its dividend by that much, Disney appears to be on stable ground for the next decade. This stock has risen roughly eightfold since the selling zenith of the Great Recession in early 2009, and it has risen to $140 from $37, while not even adjusting for a dividend that has more than tripled since our first decade call on Disney.
Are there risks to Disney’s decade-long upside case? Absolutely. As far as what can go wrong between now and then, that might take another hour to cover.
As far as evaluating Disney as a stock to own for the next decade, this is not a view that should be endorsing or panning a single quarter’s earnings report. The same is even true for a full year’s earnings. Disney’s stock has risen massively, and a different team will run Disney in the not-so-distant future as Iger is approaching 70 years old.
It seems almost impossible to expect that the decade after 2020 will see the same great gains as the past decade without a major pullback in Disney shares or the stock market in general. It’s a different time, and the business cycle is much more mature. History also would seem to dictate that the economy has to be closer to the next recession than farther away. That said, a new management team and the solid business foundation set up over the past decade by Iger and his team might make Merrill’s most optimistic upside target sound rather low for those who will try to zoom forward a decade from now.