What Keeps Me From Buying Walt Disney Co Stock

The Walt Disney Company is one of the premier large-cap growth stocks. The company is wildly successful and has grown sales and profits considerably in recent years. This trend has propelled the share price higher, and investors have been rewarded with huge gains. In fact, over the past five years, Disney stock is up nearly 200%, more than twice the S&P 500 Index's return in the same period.

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Disney has had a nearly uninterrupted run, from $35 to $105 per share in the span of three years. Disney is a true entertainment conglomerate, with a number of extremely successful businesses, including its namesake studio and theme parks, as well as a slew of media properties, including ABC and ESPN.

While Disney has proved to be a fantastic growth stock, it's not such a great stock for income investors. Disney does pay a dividend, but its dividend yield -- currently about 1% -- is far too low to make it a prime candidate for investors who want to generate income from their stock holdings. There's little reason such a huge, highly profitable company pays such a tiny dividend. The company spends much more on share buybacks than on dividends, but it could easily shift this allocation and attract a whole new group of investors.

Disney's dividend dilemmaThere's nothing wrong with Disney's core business. In fact, Disney grew revenue and earnings per share by 8% and 26%, respectively, in 2014. Each of Disney's five core operating groups-- media networks, parks and resorts, studio entertainment, consumer products, and interactive -- grew revenue and operating profit last year. The company generated $6.4 billion of free cash flow in 2014.

Yet Disney pays a pittance to investors. The company raised its dividend an impressive 34% in 2014, but even so, the stock still barely yields 1%. Disney's dividend cost the company just $1.5 billion last year, which represented only 23% of annual free cash flow.

Rather than spend more on dividends, Disney management prefers to use buy back stock. Last year, Disney spent $6.5 billion on share buybacks and lowered its diluted share count by about 3%. That's a lot of money to spend on buybacks, considering Disney spent just $4 billion on repurchases in 2013. Disney now spends more than four times more money on buybacks than it does on dividends.

Disney could easily raise its dividend by a significant amount and still have more than enough cash flow to grow the business and still allocate a reasonable amount toward buying back stock.

Disney should significantly increase its dividendIncome investors are a large group, and Disney could make itself much more attractive to these investors, at both the individual and institutional levels, if it changed its capital allocation program. The company could easily double its dividend to $2.30 per share, and Disney's dividend would still represent less than half of its free cash flow, leaving more than enough cash flow to continue to repurchase a significant amount of shares.

At a $2.30-per-share payout, Disney would yield approximately 2.2% at current share prices. This would vault Disney's dividend to above-average status, since the S&P 500 Index offers a roughly 2% dividend yield on average.

Another thing Disney could do to elevate its status as a dividend stock would be to change its distribution schedule. Disney currently pays its dividend once per year. By switching to a quarterly dividend, which the vast majority of companies do, Disney would allow its investors to compound their wealth faster.

While Disney is a great company and has rewarded its shareholders with huge stock price gains over the past several years, at this point there isn't much motivation for income investors to buy the stock. Disney trades for a lofty valuation, almost 20 times forward earnings, and yields a tiny 1%. With Disney's prodigious cash flow, there's little reason not to increase its dividend by a substantial amount. This is what keeps me from buying Disney stock.

The article What Keeps Me From Buying Walt Disney Co Stock originally appeared on Fool.com.

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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