Could Disney relaunch its dividend in the next quarter?
At the start of the pandemic, Walt Disney (NYSE: DIS) has had to close its doors to several companies that significantly contribute to its results. Management quickly realized that closing theme parks, hotels and retail stores could seriously affect their cash flow.
As a result, he cautiously suspended his dividend to save money and ensure The House of Mouse survives the pandemic. Fortunately, economies are reopening – albeit in spurts – as the world vaccinates people against COVID-19. All of Disney’s theme parks are open again and its other businesses are coming back online. The positive developments make shareholders wonder: Could Disney reinstate its dividend next quarter?
An inflated balance sheet
Disney Chief Financial Officer Christine McCarthy recently reiterated the company’s long-term commitment to paying a dividend, saying, “In light of the ongoing recovery from the COVID-19 pandemic as well as our Continuing prioritization of investments that support our growth initiatives, the board of directors has decided not to declare or pay a dividend for the first half of fiscal 2021. In the longer term, we expect dividends and redemptions to be equities will continue to be part of our capital allocation strategy. ”
In its 2019 fiscal year, the last before the pandemic disrupted operations, Disney paid out $ 2.9 billion in cash dividends. When Disney decides to pay a dividend again, it is not obligated to pay the same amount. Disney could choose to pay a lower or higher amount to make up for lost time.
However, the amount at which the dividend restarts and when it restarts will ultimately depend on the company’s operating results and balance sheet. Management will not pay a dividend if it is not in the best interests of the company. For the first nine months of its fiscal year, ended July 3, Disney generated $ 2.9 billion in operating cash, bringing cash, cash equivalents and accounts receivable to $ 29.4 billion. During that time, he had over $ 51 billion in long-term debt.
Disney certainly has a high level of cash and debt. This is understandable. The pandemic has prompted management to take extraordinary measures. But now that operations have reopened and are progressing well, management is likely considering reducing debt and returning money to shareholders. Importantly, if he chooses to use cash to repay his debt, it would reduce the interest charges he has to pay, thus increasing cash flow.
Takeaway for investors
If management continues to be cautious in returning liquidity to shareholders, the most likely reason will be the now prevalent delta variant and its ability to spread. On the other hand, if infections caused by COVID-19 are under control when Disney releases its results next quarter, management could announce a restart of its dividend. The company has no trouble generating large amounts of money if a deadly virus doesn’t get in its way.
Disney will likely take a conservative approach, given that it doesn’t want to play a reboot and pause game. If there are continuing risks to operations caused by the coronavirus, the dividend is likely to remain on hold.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.