- Disney stock has fallen on ESPN weakness that was not serious enough to alter the firm's increasingly aggressive dividend policy.
- Upcoming Star Wars release is already increasing EPS estimates that will flow through 2018.
- As market volatility increases around the Fed meeting, this is a great time to look for bargains of companies that are well-positioned for growth in 2016.
In times like these, small investors actually have a leg up on the pros. I won't fire myself if my portfolio of long-term investments drops between now and the end of the year. So why not take a chance on buying high-quality equities around Wednesday’s meeting. There are many solid companies trading at a discount, but one name stands out because of its shareholder friendly capital return policy and a meaningful catalyst before the end of the year, Walt Disney (NYSE:DIS).
Talking Weakness, Showing Strength
Disney has been vocal about some slowing in its ESPN business, but its actions imply that it will not meaningfully impact long term profit growth. The company has raised its dividend two times in the last 12 months. Normally, Disney keeps its dividend payout ratio at roughly 20% and offers a dividend once a year. However, this changed in 2015. It issued a full year dividend in December 2014, plus a six-month dividend in July 2015 when it changed its policy to offer semiannual dividends. The combination of a full year and half year dividend increased the payout ratio to 38% for the year ending in September but the dividend increased again in December to $0.71 from $0.66. If the company was truly concerned about slowing growth or cash levels, it would not have raised its dividend the second time in 12 months amounting to 20% on an annual basis.
Estimates Are Already Going Up
We all know that Star Wars: force awakens is due to be released on December 18. However analysts are already beginning to talk up estimates. FBR analyst, Barton Crockett, announced in a recent note that he is now expecting 35% EPS upside for Disney shares since he thinks the film will generate $1 billion in U.S. box office revenue. Two months ago, he had been anticipating $750 million, a massive increase before opening weekend. A good bench mark for its success will be if opening weekend sales meets the $200 million level, a nosebleed expectation. For comparison purposes, “The Hobbit: An Unexpected Journey” opening weekend in 2012 brought in $85 million.
Estimates Should Increase For Future Releases As Well
While expectations are high for force awakens, what people may not be anticipating is the waterfall effect a blowout weekend would have on future releases such as Rogue One: in Dec 2016. Disney plans to release one Star Wars movie each year through 2018 and if this year's opening weekend is successful, estimates are likely to increase for out yours as well.
The game is rigged but in your favor
Disney is a well understood company and small investors rarely get the opportunity to take money from large investors in names like this. However, with year-end just two weeks away, and a volatility producing event in two days, professional investors will not risk any loss of performance.
If the Fed offers extremely dove-ish language or decides to hold off on raising rates altogether, the market will rally. If “Force Awakens” blows out its opening weekend, Disney stock should rally. If it doesn't, the downside is you are left holding shares of a high quality company that offers a 1.3% dividend yield. It seems like a very positive risk reward scenario.