A Compelling Case to Cut Disney’s Dividend, Reallocate

According to numerous news sources including Bloomberg and CNBC, Third Point’s Daniel Loeb sent a letter to Disney DIS CEO Bob Chapek on Oct. 7 in which Loeb urged a permanent halt to the firm’s dividend payout policy in order to reallocate the roughly $3 billion annual outlay toward financing the production of additional original content for the streaming platforms. While it’s unusual for an activist investor to advocate for lower capital returns to shareholders, we agree with Loeb’s premise that Disney has an opportunity to gain further share in the streaming marketplace and that the reallocation of capital to its services would help in this cause.

As Loeb noted, Disney+ already exceeded the bottom end of the guidance of 60-90 million subscribers by fiscal 2024, largely by relying on its vast library of blockbuster films and previously released TV shows. We think an annual infusion of $3 billion to create new content across the direct-to-consumer segment would greatly help to accelerate subscriber growth, lower churn, and increase engagement across the services. We are maintaining our wide moat rating and $127 fair value estimate.

Beyond the dividend, the letter also reportedly focused on Disney’s studio, specifically the theatrical side. Loeb advocates that Disney should debut more of its blockbuster films on Disney+. While Disney did offer Mulan to Disney+ subscribers first, viewers had to rent the film for $30. In contrast, Third Point believes that Disney should hasten the decline of movie theaters by offering all of its content for “a simple subscription fee.” We disagree as we still believe that one of Disney’s advantages in a non-COVID world versus Netflix is the ability to use of multiple windows to both monetize content and keep their franchises at the forefront of consumers’ minds.

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