Yesterday The Walt Disney Company (DIS) hiked its annual dividend per share (DPS) by 33% from 75 cents to $1.00, payable in two installments over the next year. This increase is based on its strong free cash flow and FCF margins. As a result, DIS stock could be up to 35% undervalued with a price target of over $157 in the coming year.
DIS closed at $116.50 on Dec. 5, down $0.49 for the day. However, since November 14, when Disney reported its fiscal Q4 and full-year earnings for fiscal 2024, DIS stock has risen 13.4% from $102.72 on November 13.
Moreover, in the last 3 months, DIS stock has gained 32.5% from a low of $87.94 on Sept. 6. However, Disney's strong earnings and FCF margin performance in Q4, and its dividend hike could imply at least a 20% upside in the target price or fair value for DIS stock. This article will delve into why that is the case.
Historical Dividend Yield - Upside in DIS Stock
Over the past year, the company paid a 75-cent DPS, and DIS stock has ranged from $83.91 to $123.74. So, its average dividend yield is:
$0.75 / ($123.74 + $83.91)/2, = $0.75 / ($207.65/2) = $0.75 / $103.83 = 0.00722, or a dividend yield of 0.72%
Therefore, assuming that DIS stock has a mean yield of 0.72% with its new $1.00 DPS, the price should average $138.89 per share:
$1.00 / 0.0072 = $138.8888 = $138.89 average target price;
This is $22.39 higher than the $116.50 Dec. 5 closing price, or an upside of +19.2%:
$138.89 target price - $116.50 = +$22.39 potential average upside;
$22.39 avg. upside / $116.50 = +0.192, or +19.2%
Moreover, the stock could likely have a higher upside based on the highest yield over the last year. For example, at its high point of $123.74, the $0.75 DPS represented a yield of 0.606%.
So, it's possible that DIS stock could have a peak target price of $165.02:
$1.00 / 0.00606 = $165.02
Therefore, the high end of the target price range is between $138.89 and $165.02 over the next year, or $151.96. That represents an average upside of about 30%:
$151.96 / $116.50 -1 = 1.304 -1 = 0.304, or +30.4% avg. upside.
Free Cash Flow Target Price
Another way to value Disney stock is to look at its recent strong free cash flow (FCF) and FCF margin performance. For example, last quarter the company generated $4.03 billion in FCF on $22.6 billion in sales.
That represents a 17.8% FCF margin on sales, which was even higher than last year's 16.1% FCF margin (see the table below):
Therefore, if Disney keeps this up and generates this FCF margin next year, it's possible DIS stock could be worth much more.
For example, analysts now forecast revenue for fiscal 2025 will reach $100.0 billion, up from $91.36 billion for the year to Sept. 28, 2024.
As a result, if the company generates a 17.85% margin in FCF from sales, its free cash flow could reach $17.85 billion:
$100 b sales 2025 x 0.178 = $17.85 billion FCF in 2025
This could be over twice the $8.559 billion in FCF generated last year. Moreover, the market is likely to grant the stock a much higher valuation
For example, right now Disney has a $211.9 billion market cap. But assuming the market gives the stock a 6.0% FCF yield*, its market cap would be 40% higher at $297.5 billion:
$17.85 b / 0.06 = $297.50 billion forecast mkt cap;
$297.5 b forecast mkt cap / $211.9 b mkt cap today = 1.404 = +40.4% upside.
Therefore, the FCF-based price target is $116.50 x 1.404, or $163.57 per share.
(* The 6.0% FCF yield metric is based on Disney's total dividend cost being about 12% of its free cash flow. That implies that by multiplying the average dividend yield of 0.72% by the inverse of 12%, or 8.333x, the net result is a 6.0% FCF yield metric, i.e., 8.333 x 0.0072 = 0.06.)
The Bottom Line
So, using a historical dividend yield valuation method, the price target is about $152, or +30%. In addition, using an FCF yield metric based on FCF margins, the price target is 40% higher at $163.57.
So, on average Disney's stock price is worth +35% more or $157.28 per share. There is no guarantee that DIS stock will rise to this level. Nevertheless, there is good reason, as shown above, to believe that this will be its expected value over the next year.
