Saturday, July 16, 2016

Recent Buy (Tax Deferred) - DIS



The market has been trading at its all time high and my net worth is at its maximum. I should be happy, but I feel the need to be cautious. It’s difficult to find a good deal for the companies I want to buy. However, I also want to invest regularly since I need my investment to work for me. After searching through my screen and the list of companies on my watch list, I decided to initiate a position in DIS.

Date
Transaction
Ticker
Price
Quantity
Amount
Divs/Year
Est. For Dividend
7/15//2016
Buy
DIS
90.949
30
3011.22
1.32
$39.60


The Walt Disney Company  (DIS)

Investing in Disney is very easy to explain to my son. I don’t know anyone who has not heard of the company. Even when I visited Asia recently, people were asking me about the Disney theme parks.

As an overview, Disney is a media conglomerate with two distinct complementary businesses:
Media networks
  • ESPN
  • ABC, etc
Disney-branded businesses
  • Consumer products
  • Parks
  • Movies/Films, etc

The brand is a key asset - hence the wide moat.

There are risks with Disney. The media networks segment growth is highly dependent on the the growth of the transmission and compensation fees. Pay television are shrinking due to the popularity of youtube etc and this can affect the profitability of the segment. This is a very challenging market - ESPN is struggling against other popular sports programming. ABC isn’t doing too well. However, I believe the other segment Disney-branded businesses are doing exceptionally well - especially with the theme parks and Disney branded movies.


My check list criteria for investment is below:

Criteria Table

DIS 7/2016
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
Yes
6 Years
ROE/Op Margin
Stable
Yes
Stable
Long term Avg Growth
Stable
Yes
Stable
FCF over Dividends
Yes
Yes
FCF covers Dividends
M* Moat
Wide Moat
Yes
Wide
M* & S&P
Credit Rating
> BBB+
Yes
A+
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes
Cash to Debt 0.24
Interest Coverage 51.49
Debt to Equity 44
M* & S&P Stars
> 3 Stars for both
Yes
M* 4 Stars
S&P CapIQ 4 Stars
Payout Ratio
<60%
Yes
25%
Dividend Growth
& Yield
Dividend Yield
>3%
No
1.42%
Dividend Growth
>5%
Yes
18.80%
Chowder
>12%
Yes
20.23%
Valuation
Yield/Avg Yield
>1.1
Yes
1.24
Dividend Yield Theory Mid Point
Below Mid Point
Yes
Mid Point 112.76
Low Point 84
P/E
Below Mid Point
Yes
Median 18.38 Current 18.38 Forward 16.18
DRRM
~10%
Yes
Assuming 6% growth; projected return=10.21%
M* Estimate
<M* est
Yes
M* 134
S&P Estimate
< S&P cap IQ est
Yes
S&P Cap IQ 110

Note: Data from yahoo finance, google finance, guru, M*, S&P Cap IQ

Overall, Disney is an excellent company. The only thing is the low yield which is below my 3%. Since I plan to hold this for this company for a very long time, I am okay with the yield being compensated by the the dividend growth. Hopefully, over time, the yield on cost will improve.

Valuation

As you know, I try to buy companies when they are at the mean fair value or below. I use the dividend yield theory, PE analysis and DDRM for fair price calculation. You can get the valuation tool here: https://div4son.blogspot.com/2016/01/d4s-valuation-tool.html

Dividend Yield Theory


Based on the high and low yield lines, the mid point is at 1.35%

Value Pecent:

High
1.70%
Mid
1.35%
Low
1.00%

Manipulating the math, we get a mid point of 112.

High Price:
142.00
Mid Price:
112.76
Low Price:
83.53


P/E Analysis

Using the high/low P/E lines, a mid point is around 18.28. Manipulating the math, we get a mid point of 99.23.

P/E High and Low

High P/E
24.25
Mid P/E
18.28
Low P/E
12.30


High Price
131.68
Mid Price
99.23
Low Price
66.79

DDRM


DDRM

Dividend Rate ($)
1.42
Divided by: share price
99.8
Current yield (%)
1.42
Core Growth Estimate (%)
6.00
Divided by: ROE (%)
20
Multiplied by: EPS ($)
6.00
Cost of Growth (%)
1.80
Earnings per Share ($)
6.00
Minus: Dividend
1.42
Minus: Cost of Growth
1.80
Funding Gap ($)
2.78
Divided by: Share Price ($)
99.8
Share Change (%)
2.79
Core Growth (%)
6.00
Plus: Share Change (%)
2.79
Total Dividend Growth (%)
8.79
Plus: Dividend Yield (%)
1.42
Projected Total Return (%)
10.21


Dividend Rate ($)
1.42
Required Return (%)
10.00
Growth (%)
8.79
Price
116.97


Dividend Rate ($)
1.42
Required Return (%)
10.00
Growth (%)
8.00
Price
70.86


Average
93.91.

Using the DDRM model, I used a very conservative core growth of 6%, ROE=20 (based on M* data) and EPS=6 (EPS 2016 estimate for EOY), the return on investment is around 10.21%. The Fair value calculation is between 93 and 116.

Based on the tools, I am thinking the fair value is around 105.

Conclusion

This is an initial position. I don’t know how to time this difficult market, but I think the entry point is reasonable. I will add more to DIS if it drops to the low 90s, and then more when it gets to the 80s.

Do you have DIS in your portfolio? What do you think of the purchase?

D4s

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