The Business Of

Movies | Disney | What Do They Do With Their Profits?

Morning All!

A slightly shorter email today! Yesterday we put together Disney’s cost structure with their revenues. So let’s have a little recap…

• Revenues - Disney has several revenue streams. With TV networks 34% of revenues. Parks 33%. Streaming 23%. And Content Licensing 10%.

• Costs - for TV networks, Streaming and Content Licensing, content costs make up 64% of total costs! Whilst employees are the biggest cost item for Parks.

• EBIT - for 20 years pre-pandemic, Disney’s EBIT margin was remarkable. Growing from 10% in 2002 to 26% in 2018. But COVID has flipped the script.

And the chart below shows this impact of COVID. I’ve put two bars in for Disney. One’s for the margin in 2018 and the other’s for the margin in 2022. We can see pre-pandemic, that Disney’s margins were up there with LVMH and Ninety One. But post-pandemic, they’re quite a bit lower on our TBO margin rankings!

So $83bn in revenues. A 8% margin in 2022. Means ~$7bn EBIT. Where does all this EBIT go? Let’s find out now!

Reinvesting Through Content, Rollercoasters and Acquisitions…

I’ve written this word down so often this week, it’s starting to look funny when I type it now. You guys know what I mean.

What’s that word? You guessed it. Content. And it should be clear by now that Disney lives off content. Whether it’s Walt Disney Studios or Marvel Studios creating their own blockbuster content. Or whether it’s Hulu acquiring content from other networks. Or whether it’s ESPN acquiring content from the NFL. Disney needs content.

And the chart below shows us how much of the company’s ‘cash from operations’ is spent on content. I calculate ‘cash from operations’ as EBIT + D&A + Amortisation of programming and production.

So what does this show us? Well, it’s saying that from 2012-2018, of all the cash Disney was making from its operations (and before content amortisation which isn’t a cash expense). Disney was spending ~40% of it on content. And this level was actually around 40% for the best part of two decades. But the chart would have been too squished if I went back that far!

However, this has changed since 2019. And over the last 4 years, spend on content has grown at an enormous rate. From $13bn in 2018 to $30bn in 2022! Meaning, 2021 and 2022 saw Disney spend 84% of their ‘cash from operations’ on content! And the reason for this is two-fold. One, Disney+ was launched in 2019. And as we saw with Netflix, the increased number of streaming platforms has made everyone go content mad. The second reason for the higher % spend on content is the pandemic. Whilst content spending has more than doubled since 2018, ‘cash from operations’ is only marginally higher. And that’s because of Disney’s park closures and cinema closures (which impacted Disney’s movie ticket sales).

So the combined effect of Disney jumping into the highly content-intensive streaming arena. And COVID. Has meant Disney have been spending a huge proportion of their cash on content. How sustainable is this? Well, we have to save some material for tomorrow so we’ll cover that in tomorrow’s Outlook newsletter!

But before we move on, there’s two other ways Disney spends their cash in terms of reinvesting into their business. And one of them is to do with their parks. More specifically, the expansion of their parks! Back in 2018, Disney’s CEO, Bob Iger announced that Disney would be investing €2bn at Disneyland Paris to create 3 new themed areas for Frozen, Star Wars and Marvel. The French President was clearly happy with the announcement…

But why are Disney spending so much on expanding their already huge parks. It makes enough money doesn’t it? Why upgrade it? Well, it relates back to something we talked about yesterday. The price of tickets to enter Disney’s resorts have increased by ~6% per year for decades. And the reason Disney have been able to command such strong price rises is because of the investments they do to their parks. Their parks just keep getting better. New franchises bring more adoring families to their resorts who are happy to cough up more money for their kids!

The chart below shows that Disney spend ~10-15% of their ‘cash from operations’ on investments in their parks.

Okay, so that’s content spend and park investments. The final way Disney reinvests into their business is through acquisitions. Now, Disney isn’t a prolific acquirer like LVMH so it’s not a consistent spend from cash. But we have seen some decent-sized purchases over the last decade. Most recently the company bought 20th Century Studios (creators of Avatar). And the $71bn price tag the company paid for 20th Century made the acquisition the 3rd biggest in media history!

Why would Disney pay such a huge amount? Well, the assets of 20th Century included Avatar, The Titanic, How I Met Your Mother and The Simpsons. And having these classics as part of Disney’s portfolio gives Disney greater pricing power in the Streaming category. Increased revenues from their Content Licensing category. And not to mention the massive increase in Merchandising revenue from selling Avatar merch!

We Don’t Want Your Dividend!

To end today, let’s look at how Disney goes about returning cash to shareholders. And of course, we mean dividends! Let’s start with a chart showing how Disney’s EPS (earnings per share) and DPS (dividends per share) have developed over the last decade.

As we can see, Disney never had a formal dividend policy in place. Much like what we saw at LVMH. But from 2012-2018, the company paid out ~28-30% of their EPS in dividends. However, that all changed in 2020. Due to 3 factors. COVID. Streaming. And the 20th Century Fox acquisition. All 3 factors put a strain on Disney’s cash and management decided to stop dividends.

Now, some investors including Dan Loeb don’t want Disney to restart their dividends! Much like what we saw with Netflix last week, Mr Loeb wants Disney to continue investing massively in content. And giving money back to shareholders in the form of dividends would take money away from potential content spend. However, recent announcements from Disney indicate that Mr Loeb may be left disappointed. At its Q1 earnings call in Feb, management announced that they plan on restarting their dividend later this year! An interesting move, especially given how successful Netflix’s no dividend strategy was for their shareholders!

20th Apr 2023

Nigel Jacob CFA