Three Reasons to Bet on Walt Disney Co (NYSE:DIS)
Walt Disney Co (NYSE:DIS) is one of the stocks whose prospects look better, amidst concerns over health of global economy. Author VIP Equity Research of Seeking Alpha is of the view that entertainment industry is recession proof and would do well whenever there is a slowdown.
Any business with links to entertainment has always thrived regardless of the health of global economy. People need distractions when fear grips the financial and stock markets. During the great recession of the 1930’s liquor sales clocked all-time highs as people sought solace in alcohol.
Disney’s Diversified Segments
Walt Disney Co (NYSE:DIS) boasts of diversified operations touching various areas of entertainment. Its areas of operations pan areas of broadcasting, studio entertainment, as well as parks and resorts. The diversified areas of operations primarily offer a natural risk management for any investor. Weakness in one area of operation will most of the time be offset by strength in another area.
People will most of the time cut on things that come with huge expenditures such as traveling or unnecessary home renovation in times of recession. In contrast, they would be more than willing to spend more on such things as movies and theater tickets. Disney has significant exposure on the entertainment scenery through its consumer product segment.
The theme park company is already making a killing on movies and TV shows that continue to grow at an annualized rate of 11.43%. As people resort to cutting back on big expenditures demand for consumer products should continue to grow.
Walt Disney Co (NYSE:DIS) segments work to complement each other; one of the reasons the stock remains recession-proof. The company’s diversification strategy has over the years allowed it to grow both its top line and bottom line.
Robust Revenue and Earnings Growth
Over the past three years, Disney has posted an 8% growth in revenue EBITDA having grown by 13%. Its net income has also grown by 18% leading to a return on equity ratio of 18%. The management team expects consistent growth going forward as the various segment continue to complement each other.
The stock remains an exciting pick at the moment because other firms are suffering a great deal from the ongoing economic downturns. The company boasts of one of the strongest balance sheets in the sector. It also boasts of a quick ratio of 0.7 and debt to asset ratio of 19.7%.
Dividend Payout and Valuation
Dividend payments is the other thing that makes Walt Disney Co (NYSE:DIS) a must pick amidst the current rout in the stock market. For nearly 30 years, the company has never stopped or cut back on paying dividends. During the financial crisis, it was among the few companies that continued to reward investors on this front.
Disney’s dividend payments have grown by 27.9% over the last five years. The management team remains confident of the trend continuing at the back of consistent revenue and earnings growth. An adjustment of semiannual payments should translate to better payouts this year from a cash flow perspective.
When it comes to valuation Walt Disney Co (NYSE:DIS) is not cheap, and the same is not expected to change anytime soon. The stock is currently trading at an LTM P/E ratio of 17.7 having only traded below P/E of 10 during the 2008 financial crisis. Given its growth potential and performance in the recent past, the valuation by all standards is reasonable.
Risks for recession proof business
The company can sustain its growth momentum, shrugging off weaknesses in the cable business. Subscriber declines remain the biggest headwind in the sector. The trend is expected to continue in line with changes in social trends.
Changes in macroeconomic and consumer spending could also derail the company’s efforts in attaining its desired targets. However, Walt Disney Co (NYSE:DIS) shifts of focus to new initiatives such as video streaming and over the top services should help offset the cord-cutting menace.
Innovation of new products should help steer Disney to new heights on earnings return. Theme parks also continue to attract huge traffic which should help accelerate momentum on earnings growth. The opening of the Shanghai Disneyland should be good news to the investment community as the same is only expected to bolster earnings.
It goes without saying that Walt Disney Co (NYSE:DIS) is recession-proof given its array of businesses that continue to complement each other.
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