Loeb sent his proposal to Chapek on Wednesday in a letter, which CNBC has seen. Loeb’s Third Point Capital is one of Disney’s largest shareholders and bought more shares earlier this year in support of Disney’s repositioning around Disney+, its flagship subscription streaming service.
Calling for companies to suspend a dividend in favor of capital expenditure is unusual for activist investors, who typically push for corporations to do the reverse — give money back to shareholders. But Loeb argues that Disney shares can trade more similarly to Netflix if it can demonstrate its best-in-class status in streaming and bust out of the pack of traditional U.S. media companies.
“By reallocating a dividend of a few dollars per share, Disney could more than double its Disney+ original content budget,” Loeb wrote. “The ability to drive subscriber growth, reduce churn, and increase pricing present the opportunity to create tens of billions of dollars in incremental value for Disney shareholders in short order, and hundreds of billions once the platform reaches larger scale.”
Disney shares were up about 1.8 percent in mid-day trading on Wednesday. Shares have fallen about 6 percent in the past year as theme park and movie theater closures have hurt Disney’s operations. Netflix shares are up almost 95 percent over the same period.
Disney+ growth prospects
Legacy media companies, such as Disney, Comcast‘s NBCUniversal, AT&T‘s WarnerMedia, and ViacomCBS, are all transitioning away from box office movies and cable TV toward subscription streaming services. While Netflix and Amazon have a years-long head start in building a global base of streaming subscribers, Disney said in August that Disney+ has collected more than 60 million subscribers, less than a year after launching the service in Nov. 2019.
That’s way ahead of the estimates Disney provided last year, when it said it would have 60 million to 90 million Disney+ subscribers by 2024. The company’s rapid subscriber accumulation gives Loeb faith that pumping money into Disney+ is a better use of capital than paying a dividend and will further separate Disney from its media peers, which have struggled to trade at the same comparable multiples as Netflix.
While Disney has been able to woo subscribers with its large catalog of movies, “Star Wars,” and Marvel content, it hasn’t spent much on original programming. Netflix may spend more than $17 billion this year and more than $28 billion by 2028, according to BMO Capital Markets estimates. Disney said last year it expected to spend about $1 billion on Disney+ original content in its fiscal year 2020 and just $2.5 billion by 2024. Some of that original content has further been delayed by pandemic quarantines, which have halted production.
“A more aggressive content roadmap will distinguish Disney as the only traditional US media company able to thrive in a world beyond the box office and the cable TV ecosystem, alongside digital-first businesses like Netflix and Amazon,” Loeb wrote.
Loeb’s letter follows fellow activist Nelson Peltz’s investment in Comcast, another U.S. traditional media giant. Trian has not yet made its desires with Comcast public.
Disclosure: Comcast’s NBCUniversal is the parent company of CNBC.