Improved leverage and expectations for healthy growth in fiscal 2025 have played a significant role in S&P Global Ratings' decision to upgrade the rating of the parent company of ESPN and ABC Owned Stations. This development has been highly beneficial for The Walt Disney Co., as its stock has witnessed a remarkable rise of $30 per share since mid-August. The Thanksgiving holiday saw "Moana 2" smash box office records, leading S&P Global Ratings to bestow an "A" rating on Disney.

Key Factors Behind the Upgrade

Long-term earnings and cash flow guidance indicate that the company led by Bob Iger (expected to leave in 2026) is capable of accelerating earnings growth while maintaining S&P Global Ratings-adjusted leverage below 2.5x in the long term. Despite the possibility of a temporary rise in leverage upon making the final payment to Comcast Corp. for its Hulu ownership stake, it is not expected to exceed the upgrade threshold. Disney ended fiscal 2024 with S&P Global Ratings-adjusted leverage of 2.2x, and it is projected to decline further to 2.1x by the end of fiscal 2025 and reach around 2x by the end of fiscal 2026. Additionally, the company is expected to maintain FOCF to debt above 15% for at least the next few years, even as capital expenditures increase to over $8 billion annually.Last year, Disney announced a nearly doubling of capital expenditures to about $60 billion over 10 years to expand and enhance its domestic and international theme parks and cruise line capacity. S&P Global Ratings anticipates capital expenditures to rise to over $8 billion in fiscal 2025 and remain in the $7.5 billion to $8.5 billion range annually throughout the rest of the decade.After pausing share repurchases and dividend payments to reduce leverage following the 2019 acquisition of portions of 21st Century Fox Inc. and the 2020 pandemic, Disney has resumed returning cash to shareholders. S&P forecasts dividends and share buybacks totaling $4.8 billion in fiscal 2025, with approximately $3 billion in repurchases, in line with the company's guidance for 2025 share repurchases. It is believed that Disney can fund both the increased capital expenditures and the share repurchases/dividends through free cash flow, and S&P Global Ratings-adjusted leverage is likely to settle at around 2.0x.

Streaming and Experiences Driving Performance

Streaming and experiences are driving Disney's improving operating performance. This approach limits its exposure to linear TV while providing multiple scaled consumer touch points that its media peers do not possess. Disney's streaming advertising reached $3.7 billion in fiscal 2024, slightly larger than linear TV (excluding ESPN). S&P expects this to grow at a double-digit percentage rate in the coming years. The company's global position in streaming is sustainable due to its brand and IP, particularly its children-focused content.

Linear TV Operations and Challenges

Disney's linear TV operations are not immune to ongoing industry secular trends. While its smaller scale and greater dependence on the ABC broadcast network and sports programming temper the declines compared to general entertainment networks, S&P warns that linear TV revenues and cash flow are expected to continue to decline at a 9% and mid-teens percentage annual rate, respectively. The company is managing programming and selling, general, and administrative (SG&A) costs in line with revenue declines, resulting in 200-basis-point annual declines in margins. On the other hand, the sports segment is expected to see relatively stable revenues and mid-single-digit percentage declines in operating income as programming costs continue to rise.

Disney's Competitive Position

With Comcast and Paramount still building out their Peacock and Paramount+ OTT platforms without affecting their respective broadcast and cable TV networks, S&P believes Disney remains the best positioned legacy media company. It is emphasized that some legacy U.S. media and entertainment companies may struggle to successfully pivot from a linear TV-dominated ecosystem to one where streaming is the primary distribution medium. This could be due to weak assets, overdependence on linear TV, overexposure to secular trends, or strategic missteps. However, Disney stands out with its unparalleled collection of iconic brands, the breadth and depth of its film and television studios, global destination theme parks, global distribution footprint including diverse global DTC streaming services, and broad diversity in its media and entertainment businesses. In S&P's view, Disney is the preeminent media company for monetizing IP across its entire business portfolio.