Walt Disney Co (DIS)

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Disney (DIS) May Pay A 'Modest' Dividend, But Short Options Might Yield More
By: Barchart | February 12, 2023

The Walt Disney Company (DIS) released its earnings on Feb. 9 with major restructuring moves. Among these actions, management said it may pay a "modest" dividend by year-end. However, investors can potentially make more income by shorting out-of-the-money (OTM) puts and calls.

Disney's new CEO, Bob Iger stepped back into the role in November 2022 after having been Executive Chairman and CEO for many years up until retiring in 2021. But he soon faced pressure from Nelson Peltz, an activist investor from Trian Partners.

Peltz sent a letter to the Disney Board on Jan. 11 saying he will nominate himself as the Chairman. Among the changes he suggested in a scathing presentation, entitled “Restore the Magic,” was a restoration of the dividend by the year 2025. Peltz claimed that the company had poor capital allocation and should cut costs and reward shareholders.

But in the Feb 9 presentation and in the conference call with investors, CEO Iger said the company could be in a position by the end of the calendar year 2023 to pay a “modest” dividend.

However, in very fine print, barely visible, there is a footnote that says:

“Note: the decision to pay a dividend will be made by the Board and will take into account a number of factors, including the macroeconomic climate and its impacts, if any, on the Company at that time, as well as our outlook for the business.”

In other words, there are plenty of outs and Disney may keep on not paying a dividend if its Board is queasy.

Maybe the market wised up. A day later, by Friday close, Feb. 10, DIS stock was down $2.30 to just over $108 per share ($108.06). This is even below where it traded at the end of January when it closed on the 31st at $108.49.

As a result, investors shouldn't really count on receiving a dividend. They can easily make more yield by shorting out-of-the-money (OTM) calls and puts.

Shorting DIS Stock Calls And Puts

Even if the Board does decide to pay a dividend, investors shouldn't expect the dividend yield will be greater than one-half to one percent. By contrast, shorting OTM calls and puts in Disney stock could produce that yield in one month.

For example, for those comfortable doing a covered call (i.e., shorting an OTM call based on the number of shares already owned in one's account), the March 10 calls at the $116.00 strike price, 7.35% over Friday's price of $108.06, trades for $1.02 per call contract.

That is almost 1.0% (0.944%) of the stock price. And if investors can repeat this every month, the annualized yield is equal to 11.33%.


DIS Calls - March 10 expiration - Barchart - As of Feb. 10, 2023

In addition, the $117.00 strike price, which is 8.27% over the spot price, trades for 84 cents. This provides a yield-to-put spot price of 0.777%. That works out to an annualized yield of 9.33%.

Both of these are ample dividend yields, much higher than the stock could provide in a dividend yield. Moreover, the call strike prices are 7 to 8% above today's price. Even the $118 strike price, which is 9.2% over today's price, has a good yield of 0.629% on a monthly basis, and 7.55% at an annualized rate. This higher strike price makes it less likely that the investor will have to sell the stock by the end of the 28 expiration period.

Another way to play this income trade, without any risk that your stock is called away, is to short put option contracts in OTM strike prices.

For example, the investor secures $10,000 in cash and/or margin with the brokerage firm. The investor then can short 1 put contract in a trade designated as “sell to open." At the price received of $1.01 the investor immediately receives $101 per put contract sold to open.

That means that the investor earns a 1.01% return on the cash secured with the brokerage firm (i.e., $101/$10,000). The trade is considered a cash-secured put as, despite selling a put contract to buy shares that one does not own, there is sufficient cash at the designated sell price to pay for them if the contract is exercised. That will only happen if DIS stock falls 7.46% from $108.02 to $100.00 or lower.

Moreover, as the investor receives $1.01 per put contract, his or her breakeven price is actually $100-$1.01 or $98.99 per share. That means DIS stock will have to fall by $9.03 by or before March 10, or over 8% (i.e., $9.03/$108.02=8.36%). In other words, that is a steep decline. In all likelihood, the investor will likely keep most of the shorted premium, and if the trade can be repeated 12 months in a row, it works out to an annualized yield of 12.12% (i.e., 1.01% x 12).

As I wrote in a previous article on Disney stock options, this type of income options trade is very popular with investors and is likely to keep on paying dividends, so to speak, for Disney traders.

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