Walt Disney(NYSE: DIS) has "turned the corner," according to CEO Bob Iger. The company's results for the first quarter of fiscal 2024 were mixed relative to analyst expectations, but a surge in profit was enough to convince investors to push up the stock on Thursday.
Disney's adjusted earnings per share shot up 23% year over year to $1.22, and the company believes EPS will grow by at least 20% in fiscal 2024. What's more, Disney sees free cash flow coming in at roughly $8 billion for the year, up from just $4.9 billion in fiscal 2023.
This improved cash generation will enable Disney to ramp up its dividend and restart share buybacks. Disney announced that it was boosting its quarterly dividend payment by 50% to $0.45 per share, and the company plans to spend about $3 billion in fiscal 2024 on share buybacks. The new dividend plus the share buybacks add up to more than $6 billion of capital returns to shareholders over the next year.
Fueled by cost-cutting
This surge in profit and free cash flow is mostly being driven by Disney's aggressive cost-cutting initiatives. Revenue was flat in the first quarter, with growth in experiences and sports offsetting a decline in the entertainment segment. The company managed to shave off $500 million in operating costs as part of its plan to find $7.5 billion in annualized savings by the end of this fiscal year. Disney said that it's on track to meet or exceed that target.
One of the pillars of Disney's turnaround strategy is to turn its streaming business into a profitable enterprise. Before Iger returned as CEO in late 2022, the focus was on winning subscribers despite heavy losses. Disney is now focused on the bottom line.
Price hikes led to subscriber losses for the Disney+ service in the first quarter, but higher prices combined with reduced costs brought the streaming business to the cusp of profitability. Disney's collection of streaming businesses, which span the entertainment and sports segments, reported an operation loss of $216 million in the first quarter. That's a vast improvement from a loss of over $1 billion in the prior-year period.
Growing the dividend further will require the streaming business to become a source of free cash flow. Disney expects streaming to reach profitability in the fourth quarter, and in the long run, the company anticipates streaming becoming a "key earnings growth driver."
Still work left to do
Disney's free cash flow generation this year will be more than enough to cover the higher dividend and share buybacks. Beyond boosting profits at the streaming business, driving free cash flow higher in the years ahead will require the company to reinvigorate its films business.
Disney's film studios fall under the "Content Sales/Licensing and Other" portion of the entertainment segment. Revenue was down 38% year over year in the first quarter to $1.6 billion, and operating loss swelled to $224 million. While Marvel movies were once a sure thing for the company, recent releases have underwhelmed. The Marvels, for example, was a complete flop, generating just over $200 million worldwide at the box office.
The company has big plans for 2024, 2025 and 2026, including a new Frozen film, a new Toy Story film, a Zootopia sequel, a sequel to Moana, Avatar 3, a new Star Wars movie, and a variety of Marvel films. Notably, the Moana sequel was originally developed as a series, but the company decided to convert it to a feature-length film and release it this year. Leaning on sequels in popular franchises will help the cause, but the company still needs to figure out a way to reengage audiences who have cooled on the Marvel cinematic universe.
A long-term buy
Shares of Disney are down nearly 50% from their pandemic-era high. The new dividend and the share buybacks should make the stock more enticing to investors, although it will likely take profits catching up to the valuation for the stock to fully recover. Disney stock trades for more than 20 times the company's free cash flow guidance.
Free cash flow has the potential to soar in the coming years as Disney transforms its streaming business into a source of profits. Two new sports streaming initiatives, a joint venture with Fox and Warner Bros. Discovery slated for launch later this year and a solo ESPN streaming service set for 2025, could be big hits as viewers clamor for easy streaming access to their favorite teams.
Disney stock may look pricey, but the company has enormous growth potential. Disney's slate of characters, franchises, and intellectual properties is unrivaled in the media business. The task at hand is figuring out how to make it all work together in the age of streaming. While there's still work to do, Disney is making serious progress.
For investors willing to buy and hold for at least a few years, Disney looks like a fantastic turnaround stock.
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Timothy Green has positions in Walt Disney and Warner Bros. Discovery. The Motley Fool has positions in and recommends Walt Disney and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
