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Dear Disney: Don’t Throw Your Dividend Away on Content

Income investors don’t have much reason to warm up to Walt Disney (NYSE: DIS) these days, and if activist investor Dan Loeb has any say, it may be some time before the media giant restores its payouts. Disney temporarily suspended its semiannual dividend back in May, and Loeb suggests that instead of bringing it back, the House of Mouse should throw all that money into direct-to-consumer content.

The Third Point hedge fund founder argues that the money saved in distributions (nearly $3.2 billion a year based on Disney’s previous rate) could go a long way to help the company beef up its digital catalog as it faces off against Netflix (NASDAQ: NFLX) and other digital platforms. It’s a noble thought, and no one is going to argue that content isn’t king these days. But if Loeb has Disney’s ear (its ear Loeb, if you will), can I offer the media icon three simple words of advice? Don’t do it.

Alice in Wonderland with friend Mad Hatter and Rabbit in front of the Mad Tea Party ride at Disney World.

Image source: Disney.

Money matters

There are plenty of good reasons to heed Loeb’s advice, and for Disney to hold off on resuming its semiannual distributions. But none of the good reasons have anything to do with loading Disney+ with another $3.2 billion a year in content. Let’s go over the real reasons for Disney to leave it payouts on pause.

The biggest reason to keep tapping the brakes on the distributions is that payouts wouldn’t be a good look while its theme parks are announcing tens of thousands of layoffs. Even share buybacks will face a tough crowd in this climate.

Disney also should hold back on its dividend checks because there are still a lot of uncertainties in the new normal. We don’t know when theme parks will get back to normal attendance levels, even after the coronavirus has been licked. We don’t know if multiplex operators will survive or disappear, drying up a once-lucrative distribution outlet for its movie studio. Cord-cutters are eating away at its media networks, and this comes when ESPN is locked into contracts that get more prohibitive with every passing season.

The company also has more than $68 billion in total debt on its balance sheet. Despite Disney’s favorable borrowing terms, keeping an extra $3 billion around to allocate as needed will make a difference. We can also argue that with an implied yield of 1.4% based on the stock’s current price and previous rate, the dividend wouldn’t smoke out income investors anyway.

If Disney is going to use money on growing its business, is it really going to make a different in the fight against Netflix? The leading premium streaming service will spend more than $16 billion on content this year. Will Disney get more bang for its buck with less? With Disney (and everybody else) pushing out movie content that was supposed to hit theaters this year into future years, isn’t everybody going to be armed with quality content anyway? As a diversified media stock, that money could be put to work elsewhere with a better shot at moving the needle.

Wouldn’t a better investment than digital content — where everybody’s already armed to the teeth — be its theme parks? Disney announced in August that it expects capital expenditures this fiscal year to be $700 million lower than in fiscal 2019, largely as a result of a dramatic reduction in spending at its domestic theme parks and resorts. It is holding back on new attractions and resorts, things that will help that maligned segment return to its former glory sooner if it reversed that decision. Isn’t that a more crucial area for investment, especially if it gets its payroll moving higher instead of lower?

So sure, Disney. Treat that dividend like Bambi’s mother, and hunt it down. Just make sure you do it for the right reasons. Check that aim.

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Rick Munarriz owns shares of Netflix and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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