Disney (DIS) – Signal vs. Noise, Activists, and a Dividend – December 1, 2023

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Disney (DIS) – Signal vs. Noise, Activists, and a Dividend – December 1, 2023

Signal vs. Noise

Elon Musk gave a fiery interview this past week. In it, he told advertisers that left X (twitter) because they didn’t like his comments to “f off” and singled out Disney’s Bob Iger when doing so. This is in response to advertisers vacating the platform following inappropriate remarks from Musk on X.

Disney’s decision to stop advertising there got a lot of public blowback. I wanted to address why I think this is noise and not one of the pressing risks to a bull case. First and foremost, Musk owns X. His army of supporters flocks to that platform more than any other. So? When he loudly and virally tells a CEO to “f off,” of course his followers will pile on. That’s especially the case considering the engagement these followers received for doing so.  It makes it sound like the entire world agrees when it’s really just the Twitter mob.

This has been framed as a free speech issue but isn’t one in my view. It’s a matter of advertisers like Disney growing uncomfortable with a brand presence on X. I love X, and I still entirely understand this discomfort. But let’s say the complainers are right and this violates their free speech. If that were true, they wouldn’t just be boycotting Disney. They would boycott Apple, Paramount, Warner Bros, Fox Sports, Sony, Chipotle, Walmart and the hundreds of popular brands owned by Procter & Gamble, Johnson & Johnson and Unilever. Will they? No. And why? Because this isn’t about free speech. It’s about an admiration for Elon Musk and it being popular to say “boycott Disney” on that app at this time.

I don’t expect this to have any material impact on the firm or my investment case. Let’s say the few thousand screenshots of canceled subscriptions turn out to be a much worse 50,000 cancellations. That’s 0.05% of the Disney+ subscriber base. I also have readers currently at Disney’s Florida Park and California Park right now. The takeaway is uniform. They’re all filled to capacity.  Clearly the park goers aren’t modifying their patronage because Disney isn’t advertising on Twitter. The vast majority of the world does not care.

This is not a risk to the bull case. Run-rate streaming margins are a risk. ESPN competition without a mega-cap tech partner is a risk. Box office struggles, amplified by the convenience of streaming, are a risk. Making better films than The Marvels is a risk. This is not a risk. This is noise.

This changes absolutely nothing about my view of Disney. Actual subscriber, demand and margin metrics would need to deteriorate further to change my view. The woke blowback (which I largely agree with and see as being addressed) has been ongoing for a year. Margin recovery and subscriber growth have not suffered as a result.

Nelson Peltz/Trian

As previously reported, Trian has new demands as an activist investor in Disney and one of its largest shareholders. Trian wants:

  • 3 board seats (vs. 2 previously) & more board independence overall.
  • Streaming consolidation.
  • Cost cutting & asset sales.
  • A clear Iger succession plan. In an interview this week, Iger told us that we will step down when his contract expires in 2026.
  • Restructured stock-based compensation to align better with shareholders.
  • Improving financial disclosures

Cost cuts and streaming consolidation are already well-underway. It has already overhauled financial reporting segments. Disney also just named 2 new, highly qualified independent board members: Morgan Stanley CEO James Gorman and Sir Jeremy Darroch (former CEO and CFO of Sky).

Aside from that, I’d be fine with the rest of these items being passed. I’m honestly somewhat confused as to why Trian is pushing for a proxy fight if this is all that they want and if Disney is already complying. The only thing that Trian wants which Disney reportedly will not provide is a sale of ABC. I want that sale to happen and am disappointed in Iger telling us it likely won’t.

In Disney’s response to Trian, it pointed out a connection between Peltz and Isaac Perlmutter (former CEO of Marvel). Perlmutter was ousted in 2015 due to claims of somewhat inappropriate remarks and his more conservative approach to growth spend vs. Iger. Iger has since pivoted from that approach to one that resembles Permutter’s. He was ousted from Marvel in 2023 as part of broad restructuring. Perlmutter owns 25 million of Trian’s proclaimed 33 million share stake.

I candidly view Disney as more of a rental than a several year holding. This could shrink that rental period which would work for me. The outcome of this proxy fight will not impact my investment case. Trian’s demands have already influenced Disney’s actions for the better where they needed to do so; I think the pressing changes that needed to be made have been made. You may point to box office flops for why that’s not true but remember that these movies were years in the making (pre-change) and consider how Disney+ cannibalizes box office demand.

This proxy fight/cage match will be resolved by May and before then if there’s a settlement.

Dividend

Disney reinstated a smaller $0.30 dividend this week as expected. For context, this represents about 7% of their expected 2024 free cash flow. This will not prevent debt repayment or needed investments in its high-quality parks and streaming assets. The more important point that should not be lost is that the reinstatement makes Disney eligible for investing for funds like Schwab U.S. Dividend Equity ETF.  Potentially tens of billions of investible funds from major ETFs, Mutual Funds and managers are now able to invest in Disney now that the dividend is restored.

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