Why Is Walt Disney Stock Cheaper Than the S&P 500? This Is the Only Explanation.
Key Points
Disney shares trade at a forward price-to-earnings ratio that represents a 41% discount to the overall market.
The company’s entertainment and experiences segments require huge capital investments to grow.
Disney shareholders would certainly prefer greater dividends and share buybacks.
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Shares of Walt Disney (NYSE: DIS) have dropped 47% in the past five years (as of July 13). And they currently trade 52% below their March 2021 peak. This has been a difficult streak for investors to deal with.
But this entertainment stock can now be purchased at a forward price-to-earnings ratio of 12.8. This represents a notable 41% discount to the S&P 500 index.
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Why are Disney shares so much cheaper than the popular benchmark? This is the only likely explanation.
Image source: The Motley Fool.
Spending to drive growth
It's reasonable to assume that the secular decline of the company's cable TV networks is the culprit for the stock's cheap valuation. However, this doesn't seem to be the case. Even when cable TV household penetration was at its peak in the U.S. in 2010, Disney's stock didn't trade for more than 20 times trailing earnings. Even in good times, the linear networks don't appear to have had a meaningful impact on the valuation.
Consequently, I believe the market views the stock negatively due to its high capital intensity. On the entertainment side, Disney invests aggressively in its content machine. This includes live sports and high-profile films. For instance, the company signed a new 11-year rights deal in 2024 with the National Basketball Association valued at $2.6 billion per year. Plus, Disney's budget for movie releases can often run into the hundreds of millions of dollars.
For the business to maintain its competitive position in a crowded market, it has to keep spending. Otherwise, Disney risks losing viewership.
The experiences segment also requires significant capital expenditures. In September 2023, the company announced a massive $60 billion 10-year investment plan to add new attractions and expand the cruise fleet. This doubled Disney's original spending outlook.
Investors generally prefer capital-light businesses that can grow without much reinvestment. Disney just isn't structured this way.
Shareholder capital returns
Disney currently pays an annual dividend of $1.50 per share. In the first two quarters of fiscal 2026, the company's dividends totaled $1.3 billion. And it has a share buyback program in place, with $8 billion in repurchases planned for this fiscal year.
If the business didn't have to reinvest so much money in its operations, the board of directors and management team would be able to funnel even more cash back to investors. This capital allocation policy would boost shareholder returns. And that might drive the forward P/E multiple higher.
While Disney is certainly a high-quality company, history says the market never sustainably rewards the stock with a premium valuation. It's impossible to know if sentiment will ever change.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy.
