Forty years ago, I spent most of my summer in my family’s lakeside cabin in northern Minnesota. This wasn’t a luxury vacation. The cabin barely had running water. We had little to do except play in the lake.
So when word spread that the No. 1 smash-hit movie of the summer had finally made its way to the nearest town… I piled into a Chevy Vega with a group of friends and drove 35 minutes to the theater in Brainerd, Minnesota.
After a pit stop at the A&W for burgers and fries, we headed downtown to see Star Wars for the first time.
When that first Imperial Destroyer swept in from overhead, we were hooked… as were millions of people around the world. The pop-culture phenomenon has endured for decades. Today, kids are getting just as hooked by the super-popular new sequels as my friends and I were by the 1977 science-fiction classic.
Other kids (and adults) are flocking to movies built around beloved superheroes – like Iron Man from Marvel – or animated princesses – like Anna and Elsa, the omnipresent Norwegians of Frozen.
You might have noticed that I’m talking about properties that are all owned by Disney (NYSE: DIS).
Some find it unseemly that a “big corporation” owns so many pieces of our culture. Critics get particularly angry when the entertainment giant scoops up already beloved characters or franchises. They agonize over how Disney might ruin something they already love – throwing around words like “commercialize,” “sanitize,” and “Disneyify.”
For instance, Disney only took over Star Wars in 2012 when it bought the rights from Lucasfilm, the production company of the original movie’s creator, George Lucas. Many fans of the original worried that, in an attempt to sell as many merchandising products to as large an audience as possible, Disney would sap all the charm and originality out of the stories and characters.
Not me… Disney consistently cranks out high-quality entertainment. The broad success of the Marvel movies (another acquired franchise) and 2015’s Star Wars: The Force Awakens once again proves Disney knows how to make a movie. They’re fun, exciting, and wildly successful.
As a result of its long-held reputation for quality… Disney’s entertainment empire pulls in an eye-popping amount of cash. It’s not just because of the quality of these franchises. It’s because the American consumer is alive and well. And when you have a product that appeals to a wide-ranging set of folks, the “returns to scale” are massive.
People are spending their money on things they want. Total retail sales (excluding food) have grown well past what they were even in the glory days of the housing boom.
Prior to the recession, The U.S. peaked at about $320 billion in retail sales per month. That declined to $292 billion at the depths of the recession. Now we’ve steadily climbed to a new peak of $402 billion.
And many of those billions are going to Disney.
Let’s just look at the latest Star Wars movie for an example…
Star Wars: The Force Awakens sold about $2 billion worth of tickets worldwide. It cost about $245 million to make… That’s a good investment return. (We’d be happy with 716% any day.)
But don’t forget merchandise sales, from which Disney will earn an additional $6 billion.
And that’s just the first of five planned Star Wars sequels (and likely more after that).
Or think about the Marvel franchise (which Disney purchased in 2009), which creates movies based on the established comic-book superheroes.
These movies continually gross between $500 million and $1.5 billion with each release. And Disney will be putting out multiple Marvel movies a year on a road map that goes all the way out to 2028.
We haven’t even gotten to the stable of Disney princesses and their merchandise, which brings in $5.5 billion a year. Or Mickey Mouse… which brings in even more.
Disney’s distinctive advantage is about finding wide appeal in the new media environment.
Things have changed over the last few decades. We have so many entertainment options that it’s difficult to attract a wide audience.
The most-watched television episode of the 1980s was the finale of M*A*S*H*. About 125 million viewers tuned in.
The most-watched TV show of the 2010s was an episode of Undercover Boss (the ending is a tearjerker). Only 38 million watched.
Since 1980, the population of the U.S. has grown by 100 million people and the income per person has grown by 50%. That means when you can pull in a wide audience… when you can cut through all the other things that people can be doing… and find entertainment with wide appeal, the profits are outstanding.
Only Disney seems to be able to do that these days. Between its movies and its ownership of ESPN – the cable sports network that hosts the massively popularMonday Night Football – it can capture a bigger audience than any other form of entertainment.
Disney has $5 billion in cash on hand. It has a profit margin of 16.6%. Today, shares trade for 18 times earnings, which is in line with the broader market.
With several highly anticipated movies coming out in theaters and theme-park expansions planned, I wouldn’t be surprised to see even more growth this year.
Disney is just one of the 25 high-quality, blue-chip stocks I feature in The Blue Book: An Unconventional Way to Upsize Your Retirement. In this book, I explain how to use options to earn safe, reliable income on some of the world’s best companies.
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