Disney Will Reinstate Dividends, Cut 7,000 Jobs As Bob Iger Hones In On Bottom Line

Topline

Disney CEO Bob Iger outlined his plan to turn around the entertainment behemoth in the first quarterly earnings call since his return, laying out a plan to save $5.5 billion by eliminating about 7,000 jobs and restructuring the company into three divisions—Entertainment, Parks and ESPN—even as the company reported strong financial results.

Mickey Mouse rings the opening bell at the New York Stock Exchange in 2017.

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Key Facts

Iger said in the call he hopes for Disney to pay out dividends to shareholders by the end of 2023 after a three-year pause on dividends, causing shares to spike as much as 9% in after hours trading.

Disney smashed analyst expectations in its most recent financial quarter, reporting $23.51 billion in revenue and $1.3 billion in net income, or $0.99 per share, in the three-month period ending January 1; that exceeds consensus analyst estimates of $23.44 billion in sales and $0.78 in earnings per share, according to FactSet.

The company booked $7.3 billion in sales from its linear television business including ABC and ESPN, $8.7 billion in sales for its parks and experiences division, and, perhaps most crucially to investors, the company posted $5.3 billion in revenue in its direct-to-consumer segment including its Disney+, Hulu and ESPN+ services.

Disney lost $1.05 billion last quarter in its direct-to-consumer business, beating the consensus estimate of a $1.2 billion loss, a downtick from its $1.5 billion loss in the prior quarter but a massive widening of losses from its $593 million loss during the same time period in 2021.

Disney+ lost 3.1 million subscribers last quarter, falling short of analyst expectations, though Iger’s primary focus is on achieving profitability in the division as opposed to adding subscribers.

The surprise segmentation of Disney’s corporate structure comes amid growing calls to spin off ESPN, leading LightShed Partners’ Rich Greenfield to question: “Is Disney creating new ESPN financial reporting division, the first step to exiting ESPN?”

Crucial Quote

“Disney’s ‘all in’ pivot toward [its direct-to-consumer division] has provided the strategic visibility investors need to better appreciate the role media companies have in the evolving ecosystem,” RBC analyst Kutgun Maral wrote in a note to clients previewing earnings, setting a $130 price target for the stock, implying 16% upside.

Key Background

Wall Street analysts largely lauded Iger’s November 20 return as a way for the company to rediscover its massive profit-making ways as the firm struggled under Bob Chapek, who initially succeeded Iger as Disney’s top decision-maker in February 2020. Much of Iger’s current tenure has dealt with a high-profile proxy battle with billionaire Nelson Peltz, whose Trian hedge fund disclosed last month it took a 0.5% stake in Disney. Peltz is critical of Disney management’s “failed succession planning” for Iger and “flawed” streaming strategy. “Peltz will be a larger distraction than an asset,” Loop Capital analyst Alan Gould wrote in a Sunday note, citing Peltz’s misguided focus in his proxy battle. Peltz, whose 9.4 million Disney shares are now worth more than $1 billion, has made an unrealized gain of about $160 million as share prices soared, Gould noted. The ongoing proxy battle between Peltz and Disney will come to a head at the company’s annual shareholder meeting April 3, when shareholders will vote on Peltz’s hostile bid to take a seat on the company’s board.

Big Number

22%. That’s how much Disney shares are up since Iger began his two-year CEO term, compared to a 4% gain for the S&P 500, though Disney’s nearly 45% decline since March 2021 contrasts modest gains for the S&P.

Tangent

Whether Disney should pursue a sale or spin-off of ESPN remains a contentious topic among investors after billionaire activist investor Daniel Loeb launched a campaign last year for Disney to divorce itself from the legacy sports media subsidiary, before backing off of his demand. In a recent note, Deutsche Bank analysts led by Bryan Kraft said a spinoff of ESPN and potentially ABC doesn’t make a “whole lot of sense because spin offs are done to unlock value, but ESPN/ABC does not appear to be undervalued inside of Disney. Meanwhile, KeyBanc Capital Markets analyst Brandon Kispel wrote Sunday that ESPN’s “profitability may never grow again,” indicating upside to a sale for future Disney growth prospects.