Disney | Fundamental Analysis | LONG ANALYSIS

10 Jan 2022

The Walt Disney Company has been completely crushed by the coronavirus pandemic. The House of Mickey was reluctant to close the doors to several profitable operations, including the theme parks. Management admitted the possible cash trough this could provoke and quickly took steps to shore up the company's balance sheet.

One action management took was to suspend Disney's semi-annual dividend. The move would have allowed the company to avoid sending billions of cash from its balance sheet. The halt was disclosed in May 2020, and remained in place throughout the pandemic, in spite of Disney's enhancing results. This has led some investors to speculate that Disney may resume paying dividends in 2022. Let's take a look at some of the factors that management may consider when deciding whether to resume paying the Disney dividend.

Interestingly, by forgoing the semi-annual dividend, Disney saves $1.6 billion in cash, based on the $0.88 per share dividend it paid in January 2020. That's $3.2 billion a year, which could go a long way toward protecting Disney's balance sheet from any disorder rendered by the pandemic.

When it comes to Disney's balance sheet, it had $15.9 billion in cash and $13.3 billion in accounts receivable as of Oct. 3. To put these numbers in context, Disney had the most cash on its balance sheet before the pandemic - $5.4 billion in 2019. To safeguard itself from any contingency due to the unforeseen essence of a pandemic the company keeps a small hoard on its balance sheet. From that cash hoard, it can pay a semi-annual dividend of $1.6 billion over three years before the cash balance drops to a pre-pandemic high. That's assuming, of course, that the company doesn't lose money on operations during that time.

The cash balance is not a restriction on Disney resuming its dividend payments. But what about cash flow from ordinary operations? In the fiscal year 2021, which ended Oct. 3, Disney brought $5.5 billion in cash from operations. Even after investing in items necessary to run the business, the company generated nearly $2.4 billion in free cash flow. That figure may be a slight limitation since few companies like to spend more on dividends than they earn in free cash flow. In this case, at the former rate, Disney's annual dividend would be $3.2 billion and would be more than free cash flow for 2021 of $2.4 billion.

Nonetheless, management may be ready to handle a slight inequality in the short term, given the company's huge cash balance and recovering business. Nevertheless, one evident factor that could prevent Disney from resuming its dividend payout is the direction of the COVID-19 pandemic. A rise of new cases of the disease caused by the Omicron variant could push Disney into recovery.

Disney could probably resume paying the dividend in 2022. Of course, the chances of resuming the payout at the end of the fiscal year are higher. That would give Disney time to assess any modifications in the company's recovery dynamics caused by Omicron or any other emerging option. Note, however, that it was not the coronavirus outbreak that caused Disney to suspend its dividend payments, but the government-mandated closure of its theme parks and several other businesses. As more people are now vaccinated against the coronavirus, further lockdowns may not occur, making it more likely that dividend payments will resume in 2022.