Stock Market Sell-Off: Is Disney a Buy?

Last year’s stock market sell-off led shares of The Walt Disney Company (DIS 0.46%) to plunge 44% over 12 months. While the decline was substantial, the entertainment company actually fared better than its biggest competitors, Netflix and Warner Bros. Discovery, which experienced stock declines of 51% and 62%, respectively, in 2022.

The sell-off was prompted by a combination of macroeconomic headwinds and increased competition in streaming that meant succeeding in the industry was costly.

Disney’s stock has shown signs of recovery since the start of 2023, rising over 10% year to date as investors grow optimistic about the entertainment industry again. However, the company’s shares remain down 33% over the past 12 months. So is Disney a buy? Let’s assess. 

A long-term path to growth 

Disney has undergone a challenging few years, to say the least. The pandemic depleted its parks and box office revenue in 2020 and 2021. Then, economic declines in 2022 strained the streaming industry as people reduced discretionary spending. However, with a solid return of park guests and theater audiences, Disney looks to be back on the path to growth. 

Chart showing Disney's revenue and operating income rising since 2021.

Data by YCharts.

The chart above illustrates how its revenue and operating income remained nearly stagnant for most of 2021, but have shown immense improvement with pandemic reopenings. And the gains are not over yet. 

Despite theaters reopening in 2022, the market had not returned to pre-pandemic form by the end of the year. However, Disney’s recent success with Avatar: The Way of Water could mean audiences are truly back. The sequel to 2009’s Avatar became the third highest-grossing movie of all time in February, overtaking 1997’s Titanic and earning $2.24 billion globally so far.  

According to Variety, Disney spent about $460 million producing and promoting the film. Considering that the company’s latest quarter saw its entertainment and media segment report $10 million in operating losses after a costly investment in streaming content, the box office success should help Disney continue its current growth trajectory.

Disney still has a mountain to climb to get its flagship streaming service, Disney+, to profitability, especially after taking a step back in its latest quarter by losing 2.4 million subscribers. However, the CEO responsible for Disney’s golden years, Bob Iger, is back at the helm and on a mission to make streaming profitable. Moves like prioritizing quality over quantity by retaining members with a few select shows could go a long way in improving profit margins.

Meanwhile, a return to parks and box office ticket sales will keep the company growing until then.

Is Disney’s dividend coming back?

Disney suspended its dividend at the start of the COVID-19 pandemic, with its last payment date in January 2020. At the time, the company said the move would conserve about $1.6 billion in cash based on the $0.88 a share it last paid. However, recent reports state Bob Iger has asked the board to reinstate the dividend by the end of 2023. 

The CEO said his plan to cut costs by $5.5 billion will allow the company to start with a “modest” dividend and increase it over time. The return of a dividend is a positive sign as it illustrates the company’s financial confidence. Since 2020, the House of Mouse’s free cash flow has declined from $2.6 billion to $94 million in 2022. As a result, Disney has a lot of work ahead to return to its pre-pandemic form.

Disney’s dividend yield in 2019 was 1.2%, and CFO Christine McCarty has said the next one “will likely be a small fraction of our pre-COVID dividend with the intention to increase it over time as our earnings power grows.” Consequently, it’s best not to invest in Disney solely for the potential of a dividend, as there’s no confirmed date of its return, and it will be marginal when it is back.

However, if you’re looking for a stock to hold for many years, Disney is an excellent option after a sell-off. It’s on a promising growth path and is home to franchises that will likely take its streaming venture far. 

Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.