Some companies captivate investors in a way that differentiates them from the broader market. The reasons can vary from new technology like the type offered during the Internet boom, to management acumen—which has historically set apart companies such as Dow-30 component IBM (IBM – Free IBM Stock Report). There are very few companies, however, that captivate an audience, be they shareholders or movie goers, like The Walt Disney Company (DIS – Free Disney Stock Report).
Anyone who has ever walked aboard one of Disney’s cruise ships or ridden one of the attractions at a Disney theme park knows that Disney holds itself to a higher standard of service than other companies. Very few, in fact, could share a podium with Disney on the customer service front, with a notable exception being fellow Dow-30 member American Express (AXP – Free American Express Stock Report). This quality also pervades the movies and television shows the company creates.
This ability to both capture one’s imagination and provide top-notch service has been well recognized by the denizens of Wall Street, leading to an often well above market valuation for Disney shares. For example, the historical portion of the Statistical Array clearly shows that the recent relative P/E of 1.07 (found in the Top Label section of the report) is well below the levels seen in the late 1990s and early 2000s. In those years, it wasn’t uncommon to see the market price Disney shares at a relative P/E well above 1.50.
That began to change in 2004 when, despite a continued advance in earnings, the company’s valuation relative to the broader market came back to a more earthly number and, subsequently, fell below 1.00. The 2007-2009 recession, depicted on the Graph by a gray bar, left the shares trading well below the market and its own historical valuation levels. A material price drop and an earnings decline during the recession didn’t help maters.
The company, however, never changed its focus and performance has since improved markedly, with earnings in 2011 outdistancing the company’s recent “high water mark” reached in 2008. As might be expected, investors have taken notice and bid the shares of this media giant to levels not seen since 2000. The relative P/E has advanced, as well, so that the shares are once again above the level of the market. However, at 1.07, it is still well below previous levels.
The recent strong relative performance, which is highlighted by the sharply rising relative strength line on the Graph (it is the dotted line along the bottom), however, begs the question of whether Disney shares are a good investment. The answer, as always, is that it depends on the investor. With a dividend yield of 1.2%, income investors aren’t likely to find these shares too appealing (this figure is in the Top Label). Although that dividend yield is toward the high end of the company’s historic range, it is still below the level of the broader market—and this is despite an impressive 50% dividend increase between 2011 and 2012. The Quarterly Dividend box clearly shows this increase. The fact that dividends are paid only once per year is another negative for most income investors.
Investors seeking capital appreciation, however, may find a lot to like here. The company’s solid operations are one positive, the recent strong relative performance is another. In fact, Value Line’s Timeliness Rank, found in the Ranks box, pegs Disney shares to outperform the broader market over the next six to 12 months. The Above Average rank (2), along with its top-notch Safety Rank, paints a compelling investment combination of a high degree of safety and potential reward.
That said, investors seeking a long-term holding may want to take some extra time in the review process here. While the next six to 12 months appear promising, the long-term picture isn’t as appealing. It isn’t that the shares are expected to be poor performers, but based on Value Line analyst Orly Seidman’s three-to-five-year projections, annualized total return, which includes dividends, is expected to be in the 7% to 12% range (found in the Projections box). While that wouldn’t be a poor showing, especially for an $88 billion market cap company (found in the Capital Structure box), it is likely below the levels that a growth oriented investor would normally find appealing. Still, more conservative growth investors might be interested.
So, high-quality Walt Disney shares are again trading at a premium to the broader market. That shouldn’t dissuade momentum investors from a commitment in the shares which are still trading at a discount relative to their historic levels. Longer-term investors, however, should strongly consider the reason for owning shares in Disney—if safety is a concern, then they make sense; if capital growth is the focus, then there are likely better options available. Income investors, meanwhile, still won’t find much to like in this high-quality company’s yield.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.