That was the second dividend cut in my portfolio! Last week it was Royal Dutch Shell and you can read my response to it here. Yesterday it was the Disney dividend. I really hope that the speed of announcements slow down a bit, because otherwise there won’t be any dividend income left anymore by the end of Q2 😉
I actually didn’t see it coming in the case of Disney. They surprised me already a while ago with the dividend freeze and after that they surprised me with the sudden CEO change.
This was the third time in a short while that the company took me totally off-guard. And it’s not that I’m not following this company closely, because usually you can read things between the lines by looking at what companies aren’t saying. Hence why I wasn’t so surprised by Shell’s dividend cut.
Disney’s earnings report actually didn’t mention any of it. It was only mentioned in their Earnings call afterwards:
“We continue to actively evaluate additional mitigation strategies to position our company to emerge from this crisis with the financial flexibility necessary to get back on a growth path. From a cash flow standpoint, the Board has made the decision to forego payment of a semi-annual dividend for the first half of the fiscal year, which would have been payable in July. This preserves about $1.6 billion in cash assuming we had held the dividend constant at $0.88 per share. We also identified opportunities to reduce our capital spending and we now expect total CapEx for fiscal 2020 to be about $900 million lower than our prior guidance, or $400 million below prior year, driven primarily by paused construction and refurbishment work due to the temporary closing of our parks.“
Source: Earnings call transcript
It almost feels like it was a last-minute and ad-hoc decision. They are actually mentioning a dividend suspension, not a dividend cut. And they also suggest that they will evaluate the next dividend payment again. For now their main aim is to preserve 1.6 bln USD in cash.
“And on the dividend, really these are always very, very tough decisions. But we made a decision for this quarter. We don’t have a crystal ball that allows us to see into the future for how long this disruption is going to keep our businesses closed partially or fully. So we will address the dividend again in the next 6 months.“
Source: Q&A earnings call transcript
Having said that, every dividend cut for me is a reason to consider selling my position in the company.
As I mentioned in last week’s post, I always consider my past investments to be a sunk cost as part of my decision-making to take out the emotion of losses in future decisions. I also try to look at the opportunity-costs of keeping the shares compared to selling them and redeploying the cash towards different stocks.
In this case I have decided to sell my whole position in The Walt Disney Company and I will explain a bit further why.
Reasons for selling
👉 My investment thesis is gone
I started accumulating Disney 1,5 year ago due to the attractive valuation it had at the time, a strong dividend growth track record and I just truly love the brand. The company is also well diversified. Therefore I thought that it would be well positioned to weather any upcoming economic downturn.
Some impact was always foreseen, because it’s by nature a cyclical business. The balance sheet and a relatively low payout ratio should’ve provided a safe dividend during these kind of times.
Having said that: the stock is currently not attractively valued, the dividend growth track record is gone and the diversification didn’t seem to be a benefit (see next).
👉Truly in the COVID-19 blast zone
Well, as we all know, Disney is just in the eye of the blast-zone regarding the COVID-19 pandemic. Whether those are the parks, the cruise-lines or the cinema’s: it’s just horrible!
The only bright light in these times is their subscriber growth for Disney+. Unfortunately this is also a loss-making business for them and this will still impact their bottom-line negatively in the upcoming quarters to years.
Investing in Disney now would be like investing in Netflix. The several loss-making business attached to Disney would be the main difference. I am not interested in owning Disney purely for their streaming business, because I am not a growth investor.
Disclaimer: I do allocate max 10% of my portfolio as “mad money”, so I do own few growth stocks ($FB, $GOOGL). I just never really discuss that here and I consider it out of my circle of competence.
👉 Lack of transparency towards shareholders
Another reason for me to consider selling the stock is their lack of transparency towards shareholders. As I mentioned earlier in this post, the board surprised me already three times in the last few months with their ad-hoc actions. I don’t like surprises like that.
It sounds like: board first, stakeholders second, shareholders last.
👉 The Disney dividend suspension itself
As I mentioned earlier, my thesis doesn’t apply anymore. But that’s not just it. The fact that they so quickly suspended the dividend really surprised me. Their balance sheet is relatively healthy although they just purchased the Twentieth Century Fox assets.
This just tells me that the current board of directors is not so focused on dividend growth. This is OK for me. I am actually a big fan of prudence towards their capital allocation, but at the same time I expect them to appreciate their shareholders. Especially those that depend on their dividends for income.
Don’t get me wrong, I’m not blaming the board of directors for cutting the dividend.
I can only control my own actions and try to take the learnings out of it so that I minimize future investment mistakes.
In this case I consider the pandemic impact to Disney largely a force of the majority. Pity that it happened, but I don’t need to stay around.
👉 Other opportunities
At the moment there are just other opportunities that I find more attractive. Unlike Shell, Disney doesn’t pay a dividend now and one of my investment theses is always to consider a starting yield.
Therefore I have decided to sell my full position in Disney at ~101 USD per share and I redeployed the funds in Chubb Limited, 3M and PepsiCo.
Chubb Ltd is a new position to me. I find it currently attractively valued at ~100 USD with a yield of 3.12%. I still have an action to update my portfolio allocation strategy based on the latest developments, but I have decided to include Chubb in my portfolio due to its strong membership in the Noble 30 index.
3M and PepsiCo are additions to my existing Tier-1 positions which I find fairly valued at this moment in time.
Another reason why I purchased these companies is due to the US Dollar currency. I typically reinvest my funds (capital or dividends) in the same currency to sustain my level of currency risk and to avoid currency transaction fees.
The positive side-effect of these trades is that my dividend income actually grew from 1.8% yield on cost to 3.25% yield on cost.
Next Steps after Disney dividend suspension and stock sale
There are still few next steps that I need to do.
First of all I will remove the Walt Disney Company as a Tier-1 stock from my desired portfolio. This really hurts, because both dividend cuts were impacting a Tier-1 portfolio position. I’m just glad that this didn’t happen to me while being retired!
Secondly I will update my allocation strategy, because I will need to replace Disney with another Tier-1 company. I need to do some further analysis to find the strongest candidate. I am actually working on that list already for few weeks, but recent events just keep me from finalizing it. Just expect some more European companies from the Noble 30 index in the list.
Lastly, let time pass by a bit and re-evaluate my learnings from this investment. It’s still to fresh now and such assessment works best for me after some time when I’m having a bit more distance to it.
I really hate having sold Disney, because it’s truly a wonderful brand. I grew up with it and my kids also love it. A great brand just doesn’t make it automatically a great stock. My investment thesis is just gone due to recent events.
We’ll see how it goes, but one learning that I have is to keep my emotions out of my decision making process. This is hard, but I’m trying.
Who knows, maybe I will get back into Disney again in the future, because it’s not likely that a pandemic of this nature will happen to us every decade if we take history as a guidance. Just don’t expect it in the upcoming years.
Unless the price drops in half without a change in future earnings power. However, for that I use mad-money, which is not aimed at retirement income ;-P
Difficult times! I keep on humming, but at the same time I try to keep investing intelligently.
Let me know what you think. Any feedback is welcome!
European Dividend Growth Investor