The Walt Disney Company (DIS): Four Reasons This Stock Looks Overvalued

The third problem: The company has the highest core free cash flow payout ratio of their peers. Core free cash flow is simply net income, plus depreciation, minus capital expenditures. Using this measure, Disney paid 44.06% of their free cash flow in dividends.

By comparison, Time Warner Inc (NYSE:TWX) paid 32.04%, Comcast paid 19.06%, and CBS Corporation (NYSE:CBS) paid just 14.86%. While Disney’s payout ratio isn’t troublesome, Disney is starting from a higher number, so without superior cash flow growth, future dividend increases may be lower than investors expect.

Lastly, Disney’s stock isn’t the relative bargain that it used to be. In prior quarters, I would compute a PEG+Y ratio for Disney and their peers, and Disney was in the middle of the pack. The PEG+Y is the company’s yield, plus its earnings growth, divided by its expected P/E ratio. The higher the number, the better, since this means the company has a higher expected total return, and a lower relative P/E ratio.

Using this measure, Disney comes in dead last, with a PEG+Y of 0.72. This isn’t a surprise, because at 19 times forward earnings, Disney is relatively more expensive, and their 12.5% earnings growth rate, ranks second lowest. By comparison, Comcast Corporation (NASDAQ:CMCSA) scores the best, with a PEG+Y of 1.14, while Time Warner Inc (NYSE:TWX) and CBS Corporation (NYSE:CBS) essentially tie for second at 0.89 and 0.87 respectively.

Stay tuned, Mouseketeers