Disney Suspends Dividend Due to COVID-19

Disney’s DIS fiscal second quarter was slightly better than expected as revenue and adjusted EBITDA both came in slightly ahead of FactSet consensus despite the impact of COVID-19. The board announced the semiannual dividend for the first half would be suspended, saving the firm roughly $1.6 billion in capital based on the previous payment of $0.88 per share. Given that the firm had $14 billion in cash at the end of March with another $17 billion available via its credit facilities, we think the dividend suspension is less about preserving cash and more about the perception of paying a dividend while furloughing over 120,000 employees. We are maintaining our wide moat and our FVE of $130.

Revenue for the quarter increased 21% year over year to $18.0 billion. Media networks revenue improved 28% due to the Fox consolidation. Affiliate fee revenue in the quarter was up 16%, which was made up of a 12 point increase from the Fox assets and a 7 point gain from higher pricing, with a 3 point decline from fewer subs, implying 4% growth in affiliate fee revenue excluding the Fox impact. Unsurprisingly, management expects a large decline in ad revenue at ESPN next quarter given the lack of live sports. Segment operating income margin for media networks fell to 32.7% from 39.5% due to the loss of live sports, higher sports rights costs, and increased costs for the ACC Network launch.

Revenue at the direct-to-consumer segment hit $4.1 billion due to the launch of Disney+. Studio revenue was up over 18% as the Fox consolidation offset the theatrical shutdown. Revenue for the parks and experiences segment only fell 10% versus the previous year, well ahead of our projection for a 30% decline. Surprisingly, management expects to reopen the Shanghai park on May 11, albeit with a very constrained capacity limit. We think that the Chinese government could rescind its permission to reopen the park at any time over the next few months as it has with other reopenings like movie theaters.

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