Disney to buy-back shares

[MichWolv]

Disney has been buying back shares for years, they only said they will double the volume in 2014. A company buying back shares in no way helps it go private. A company can not own itself, an invester would have to purchase all outstanding shares to go private. As shares are bought back, the number of outstanding shares is reduced and the value of the company is then spread across fewer shares, thus raising its share price. This is a method of returning value to shareholders while avoiding taxes on dividends and (I believe) retained earnings. Disney can either retire these shares (removing them from the market permanently) or hold them as treasury shares to later distribute as employee incentives or sell on the open market. However, if the shares are reissued, that would dilute the market and lower stock value. This would normally only be done if the company thought its shares were significantly undervalued and selling at a later date could generate a greater return than the diluted value.

As for it being "better" to spend the money on the parks, for many accounting and tax reasons, it is often better for a company to use cash to buy back shares and then borrow money for capital projects. I don't fully understand it, but it comes down to doing everything you can to increase the value of the company while minimizing the taxable earnings.

There is no tax on retained earnings and taxes on dividends and capital gains are the same, so there's no advantage there. Those taxes are paid by the shareholder, not the company.

Buy backs can be part of a going private plan. Happens all the time. By getting cash cash out of,the company in buying shares, you reduce the total value of the company. That makes it easier to fund a going private transaction. Moot point for Disney -- this buyback is a drop in the bucket.

The share price should not go up when the company pays $65 for something trading at $65. If it does go up, it isn't due to the Buyback itself, but due to the market believing the company is signaling good times ahead by buying back stock. In other words, the company, which knows more about its future prospects than anybody else, is saying its rock is undervalued. If the market believes that, the stock price will go up.

Reissuing shares at fair value does not dilute the value of other shares.

As for the cost of debt v equity financing, there are a number of reasons that might favor debt financing right now, tax included. But Disney hasn't made a move to issue debt, and most believe the cost of debt will go up soon, so if Disney had plans to borrow, they'd probably be jumping in now, and they aren't.

 

[MichWolv]

I'm well aware of the accounting twists and turns, In a prior life I wrote accounting systems, This is strictly a short term move which will damage long term shareholder value.

Did you manage multibillion dollar corporations in a prior life as well?

 

[ford91exploder]

You also have to remember this is 'The Walt Disney Company' not Walt Disney World. Only a fraction of the money that comes in is from the theme park operation. Studios/Television have a much larger revenue stream.

If you look at the 2013 Financials the Disney cable networks bring in the lion's share of profit at approx 2.1 Billion, P&R comes in at 689 Million and the rest of TWDC comes in at about $350 mil on a quarterly basis

Not bad for a Division which is only 17% of TWDC

 

[TowerOfTerror]

Buy backs can be part of a going private plan. Happens all the time. By getting cash cash out of,the company in buying shares, you reduce the total value of the company. That makes it easier to fund a going private transaction. Moot point for Disney -- this buyback is a drop in the bucket.

At current pricing levels the buyback can grab up to 6.8 percent. Not too shabby in my book. Now only if they stopped handing out shares like candy to the executives life would be grand.

 

[ford91exploder]

Did you manage multibillion dollar corporations in a prior life as well?

No but i'm pretty good at deciphering P&L, balance sheets and reading 10K's, It does not take much imagination to see that the executives are doing what looks like a pump-n-dump as all 'growth' has been because of cost-cutting and price increases and that strategy has it's limits and with Disney Deluxe resorts at %35 occupancy according to some in the industry it may already be at its limit.

Only UNI has seen organic growth in their business and interestingly enough they are the only ones INVESTING in their business, Comcast throws off far less cash than Disney due to their recent buyout of NBCU but still they continue to invest in what looks like a growth business. Assuming number of visitors to Central FL remains the same the game is Disney's to lose.

 

[GoofGoof]

How many shares were issued to buy Lucas Films? How many shares are they buying back? The net outstanding shares even with the buyback are much higher than a year or 2 ago. Doesn't seem likely they want to take the company private.

Comcast is buying back shares too. I think they announced a $6.5B buy back program last year which was maybe half complete. Not sure if they upped it for 2013. They could double the size of Universal Florida with that money. It's a common practice. No big deal.

 

[MichWolv]

No but i'm pretty good at deciphering P&L, balance sheets and reading 10K's, It does not take much imagination to see that the executives are doing what looks like a pump-n-dump as all 'growth' has been because of cost-cutting and price increases and that strategy has it's limits and with Disney Deluxe resorts at %35 occupancy according to some in the industry it may already be at its limit.

Only UNI has seen organic growth in their business and interestingly enough they are the only ones INVESTING in their business, Comcast throws off far less cash than Disney due to their recent buyout of NBCU but still they continue to invest in what looks like a growth business. Assuming number of visitors to Central FL remains the same the game is Disney's to lose.

We should alert Disney that a simple review of their P&L is all it takes to prove their strategy is dumb in the long run.

 

[Victor Kelly]

How about new monorails. A real transportation hub that link monorails, peoplemovers, etc like in the concept art for EPCOT. Linking all parks, shopping, and side attractions while reducing bus usage.

Seems like a better proposition, after all, time spent traveling is time not spent in a store, restaurant or park, or attraction like mini golf.

 

[lentesta]

Just like Universal couldn't think of anything better to do than expand Potter. In other words, anytime a company spends money on something, they do it because they thought it was the best way to spend the money, and couldn't think of a better way.

To be clear, Disney doesn't think that spending $6 to $8 billion on things like acquisitions, expansion of existing assets, or starting new lines of business, has the same level of risk and profit as buying back shares.

This Wall Street Journal article seems to conclude that most share buyback programs deliver worse long-run returns than, say, capital investment, acquisitions, and R&D. We won't know the result for many years, of course, but let's be suspicious when management says they can beat the odds.

ETA: Let me be clear that I'm not against all share buyback programs. Had Disney said in 2010, "Look, the worst of the crisis has passed. It might take a long time for things to get better, but we think the stock is greatly undervalued because everyone is still hesitant to take on risk" I could have seen that as a sensible strategy.

 

[MichWolv]

To be clear, Disney doesn't think that spending $6 to $8 billion on things like acquisitions, expansion of existing assets, or starting new lines of business, has the same level of risk and profit as buying back shares.

This Wall Street Journal article seems to conclude that most share buyback programs deliver worse long-run returns than, say, capital investment, acquisitions, and R&D. We won't know the result for many years, of course, but let's be suspicious when management says they can beat the odds.

ETA: Let me be clear that I'm not against all share buyback programs. Had Disney said in 2010, "Look, the worst of the crisis has passed. It might take a long time for things to get better, but we think the stock is greatly undervalued because everyone is still hesitant to take on risk" I could have seen that as a sensible strategy.

But your last point is exactly the point. In 2010, despite the evidence that suggests buybacks don't deliver value, you would have thought a buyback was sensible. Management thinks one is sensible now. They have more information than we do. Hard for us, I should think, to suggest that nonetheless, we know better than they do.

Mind you, I'm not arguing that using $8 billion to buy back stock is somehow good news for the parks...it very likely is not. But it may well be good news for the company and its investors.

 

[GoofGoof]

But your last point is exactly the point. In 2010, despite the evidence that suggests buybacks don't deliver value, you would have thought a buyback was sensible. Management thinks one is sensible now. They know more than we do. Hard for us, I should think, to suggest that nonetheless, we know better than they do.

Mind you, I'm not arguing that using $8 billion to buy back stock is somehow good news for the parks...it very likely is not. But it may well be good news for the company and its investors.

Not good news for the parks, but not necessarily terrible either. This is announced as part of the 2014 plan. It is bad news in that it limits cash that could be spent on capital investments in 2014, but they weren't going to spend much on P&R in 2014 anyway. Even if several large projects were greenlit today with the pace Disney builds at there wouldn't be a large spend in 2014 anyway. Most construction would probably happen in 2015 and/or 2016. They can still ramp up capital spend again in 2015 if that's the direction they choose. $6B to $8B sounds like a lot, but they had been buying back $4B a year anyway so its really just an increase of $2B to $4B.

 

[flynnibus]

Whoever does not see this as a positive is a fool. Anytime Disney can buy back shares it is a step in the right direction for the company long term since it eases the ever demanding pressures of quarterly profits

Me thinks someone has no idea what buybacks are and their use.

They have nothing to do with taking a company private. (tho obviously a private plan requires buying out all the shareholders)

 

[GoofGoof]

Me thinks someone has no idea what buybacks are and their use.

They have nothing to do with taking a company private. (tho obviously a private plan requires buying out all the shareholders)

No chance Disney will ever be private again without selling off massive pieces of the business. DIS has a market cap around $120B. The largest leveraged buyout in history was the energy company TXU back in 2007 for $45B. Anyone living in the Dallas area can tell you how well that is going. If you want to buy some of their debt today you can pick it up for pennies on the dollar. They are likely to not have the cash to cover a large debt payment coming up and are heading towards bankruptcy. Bringing Disney private would create a debt load almost 3 times as high. They would need something like $10B a year just to pay the interest on the debt alone.

 

[MattM]

What this typically means is that management can't think of anything better to do with the money.

I think that's a bit over-simplified.