This Is One of the Highest-Quality Companies in the World

Theme parks.

Blockbuster movies.

Television networks.

Cruise lines.

What company owns such a diverse array of businesses?

Even more important, what company is so incredibly successful at bringing all of these businesses together, tying them all in and generating a ton of profit in the process?

Walt Disney Co. (DIS) is that company.

[ad#Google Adsense 336×280-IA]Walt Disney Co, together with its subsidiaries, operates as a global diversified media and entertainment conglomerate.

The company has come a long way since being founded in 1936 by Walt Disney – a man with a dream and an ability to make animation come to life.

Walt Disney Co. operates through five segments: Media Networks, 43% of fiscal year 2014 revenue; Parks and Resorts, 31%; Studio Entertainment, 15%; Consumer Products, 8%; and Interactive, 3%.

So we can see here, based on how sales break down, that the networks are actually what generates the majority of revenue.

One needs to look no further than ESPN there, which is really Disney’s crown jewel.

It sports the highest subscriber fees of any cable network, and has long-term contracts with incredibly popular programs like Monday Night Football.

In addition, the company owns some of the most popular and successful movie franchises of all time.

Think Avengers, Frozen, Star Wars, Toy Story, and Pirates of the Caribbean.

Four out of the top 10 all-time highest-grossing movies belong to Disney or one of its subsidiaries.

Two of the four – both have grossed more than $1 billion worldwide – are part of the Marvel universe: The Avengers, and Avengers: Age of Ultron.

And the company has what will surely be a blockbuster in Star Wars: The Force Awakens, opening later this year.

That’s right, through incredibly intelligent acquisitions of Marvel and Lucasfilm over the last decade, the company has acquired the rights to characters ranging from Iron Man to Darth Vader.

And, of course, there are the parks.

Ever stand in line at Disney World and wonder how many people can fit in one park?

Or, better yet, ever wonder how much money Disney must make?

You’re about to find out.

Revenue for the company jumped from $31.994 billion to $48.813 billion from fiscal years 2005 to 2014. That’s a compound annual growth rate of 4.81%.

Meanwhile, earnings per share grew from $1.24 to $4.26 over the last decade, which is a CAGR of 14.7%. Not too shabby for a company nearing 100 years old.

A substantial improvement in profitability over the aforementioned time frame along with a major reduction in shares outstanding – DIS has repurchased approximately 16% of its shares over the last decade – has helped the bottom line immensely.

S&P Capital IQ predicts that EPS will grow at a 13% compound annual rate over the next three years, which isn’t far off from what the company has generated over the last decade.

Really solid growth here. But all the growth in the world means little to me if the company isn’t sharing it with shareholders. As a shareholder, you have a rightful claim to a growing piece of the growing profit pie, and DIS doesn’t let shareholders go hungry.

The company has been paying a dividend for over 30 years and has increased it for the last five consecutive years after holding it static from 2007 to 2009, a period that coincided with the financial crisis.

But what they lack in a lengthy dividend growth record they make up for in terms of the actual dividend raises – the five-year dividend growth rate stands at an astounding 19.7%.

CaptureAnd with a payout ratio of just 24.7%, there’s plenty of room for future dividend raises.

The only drawback to the stock’s dividend is the yield.

At only 1.01%, it’s not exactly attractive to anyone who needs or seeks income. But I think you have to weigh that against the phenomenal historical growth and potential for growth moving forward.

In addition, that yield is a function of both the dividend and the stock price, and demand for the stock is driving down the yield. Nonetheless, the five-year average yield for the stock is 1.3%, so we could be looking at a premium here.

DIS’s quality can also be seen when looking at the balance sheet. The company maintains a long-term debt/equity ratio of just 0.28 and an interest coverage ratio over 42. These are incredibly solid numbers, which is made even more impressive when you consider the acquisitions the company has made over the last decade.

Profitability, as probably expected, is robust. Over the last five years, DIS has averaged net margin of 12.92% and return on equity of 13.93%. Both metrics stack up well against the competition and both have also steadily and incrementally improved over the last five years.

Fundamentally, DIS is an extremely high-quality company across the board.

Excellent balance sheet, solid and improving profitability, fantastic growth, and a dividend that should continue to increase at an attractive rate for years to come.

Qualitatively, what’s not to like?

The brand name is about as trusted and well-known as it gets. Investing in Disney is almost like investing in childhood, which is basically perpetual for as long as humanity continues to grow.

The parks are constantly busy, providing a unique entertainment experience for the individuals and families that visit. The domestic parks feature amazing pricing power due to that unique experience, which allows Disney to keep them full even while incrementally increasing prices over time.

Meanwhile, the company is growing its international park presence via opening new parks around the world. Shanghai Disneyland Park is an upcoming example of this, which should open in spring 2016.

Disney also excels at tying in its multiple media enterprises. This allows them to launch successful movie properties ranging from Frozen to The Avengers and reap incredible profit, but also tie these characters into their parks through themed attractions while licensing the toys through merchandising deals. There’s incredible continuity there that Disney is peerless in. The new Frozen attraction coming to Epcot is a great example of this.

And their network/cable properties are fantastic. ESPN is the sports network, whose high fees allow them to reinvest in the network by landing lucrative long-term deals in sports programming. And the network has expanded its clout through multiple extended channels like ESPN2 and SEC Network as well as

In addition, they own the Disney Channel, which is available to almost 100 million pay television households (and gives DIS excellent tie-in opportunities), and ABC, one of the four major domestic broadcast networks. Add in cruise lines and resorts and that adds up to one incredible company.

However, one should consider risks ranging from the difficulty of creating engaging original content to the possibility of any economic downturn and how that could affect discretionary spending on theme parks.

Shares in DIS are trading hands for a P/E ratio of 24.45, which seems fairly reasonable for a company of this quality. But that is substantially higher than both the broader market as well as DIS’s five-year average P/E ratio of just 18.2. It’s possible shares were just plain cheap before, but it’s also possible that it’s expensive now.

I valued shares using a two-stage dividend discount model analysis with a 10% discount rate. I assumed 20% dividend growth for the first 10 years and 7% terminal growth thereafter. The 20% isn’t actually that high when you look at what the company has produced over the last five years; the most recent dividend increase was over 30%. I’m also factoring in a low payout ratio and strong underlying profit growth. The DDM analysis gives me a fair value of $117.06.

scBottom line: Walt Disney Co. (DIS) is arguably one of the highest-quality companies in the world, with incredible media and entertainment properties that allow the company wonderful tie-in opportunities. Although the dividend growth record is short, I’m confident the dividend will continue to grow for years to come, and at an attractive rate. The stock seems roughly fairly valued here, but only if they can keep up their stellar growth. If you’re looking for exposure to media and entertainment, I can’t think of a better stock than this one.

— Jason Fieber


Recent alerts featuring Disney (DIS):
This Stock is a Great Foundation for Your Portfolio – June 30, 2015
This is One of the Highest-Quality Companies in the World  – June 30, 2015
This Stock is Soaring – June 29, 2015
How to Get Rich Investing “Outside the Stock Market” – May 11, 2015