Disney is in the sweet spot

The entertainment and media giant is an 'easy hold' stock set to continue rewarding long-term investors.

By TheStockAdvisors May 6, 2013 9:06AM

File photo of visitors walking on Main Street at Walt Disney World on June 5 2012 in Lake Buena Vista Fla © John Raoux APBy Chuck Carlson, DRIP Investor

The sweet spot for investors right now seems to be companies with strong brands, rising dividends, and fairly reliable earnings streams. Walt Disney (DIS) shares seem to fall perfectly into that sweet spot.

The company's diverse operating base, from broadcasting to theme parks to movies, should generate steady profit gains, and record per-share earnings are expected for fiscal 2013 ending in September. The stock held up well during the market's recent bout of volatility, and I expect these shares to outpace the overall market for 2013 and over the long term.

Disney is a major player in media, with its ESPN unit perhaps the most prized asset on the cable dial. The company also owns ABC network. An improving economy should fuel increased advertising revenue for the broadcasting business.

Disney's theme park business should benefit from an improved economy. Theme-park attendance should also benefit from lower fuel costs, which makes the trip to the parks cheaper for consumers.

The company has spent aggressively to expand and update the parks, and that investment should begin to pay off over the next year.

The movie business is notoriously volatile, and Disney has had its share of both feast and famine in this business through the years. However, a slate of promising movies, headed by the May release of Iron Man 3, should help drive improved results over the next several quarters.

The LucasFilm acquisition (and with it its Stars Wars franchise) should prove a plus for Disney's movie business as well as theme-park operations.

Disney has done a good job of beating Wall Street's expectations, exceeding the consensus earnings estimate in three of the last four quarters.

For fiscal 2013 ending in September, the consensus estimate is $3.45 per share, a gain of 12% over the previous year. For fiscal 2014, Wall Street is looking for profits to approach $3.90 per share.

Disney is rarely a cheap stock. However, trading at 18 times fiscal 2013 earnings estimates, the shares seem reasonably priced compared to other brand-name consumer plays.

Disney typically pays a dividend once per year. However, to beat the dividend tax hike in 2013, the firm pushed the 2013 payout into December of last year. It will be interesting to see if the firm pays a dividend in calendar year 2013.

With a payout ratio (per-share dividend divided by per-share earnings) of just 22%, Disney certainly has room to continue to increase the dividend at a double-digit clip. Based on the last dividend payment, the stock yields 1.2%.

Disney is what I like to call an "easy hold" stock. It may never be at the top of the leader board in a given year, but the stock generally chugs along, providing solid gains for investors.

I expect these shares to continue to be a rewarding investment. I'm comfortable initiating positions in Disney at current levels and would buy aggressively on pullbacks to the mid-$50s.

Please note that Disney offers a direct-purchase plan in which any investor may buy the first share and every share of stock directly from the company.

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