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Financial Review:
In a year centered around the acquisition of Capital Cities/ABC, Inc., The Walt Disney Company remained true to its fundamental financial goal of creating shareholder value. The ongoing integration of these two preeminent companies and their world-renowned brands allows Disney to position new assets alongside existing ones and to continue the tradition of providing earnings growth and new value for shareholders. Overview In 1996, the company's pro forma earnings per share increased to $2.23, 15% higher than 1995 pro forma earnings per share of $1.94.
The company believes that pro forma results, which assume the acquisition of ABC had occurred at the beginning of each fiscal year period, represent the best comparative standard for assessing earnings growth. Additionally, Disney believes that the most meaningful measure for valuation purposes is pro forma earnings per share adjusted to exclude the amortization of goodwill associated with the acquisition. This non-cash charge was approximately $0.66 per share in 1996; pro forma earnings per share before goodwill were $2.89. Disney's continued financial success is due in part to the implementation of the company's overriding strategic objectives: to sustain Disney as the world's premier entertainment company; to protect and build upon the Disney name and franchise; and to preserve and foster quality, imagination and guest service. Following the acquisition, the company's ongoing financial objective is to achieve 20% compound annual growth in earnings per share over any future five-year period. Additionally, steady improvement in return on equity (ROE) remains a secondary, but important, financial objective. Disney's pro forma ROE in 1996 was 10%, significantly lower than the prior year's ROE primarily due to the issuance of almost $9 billion of new equity in the acquisition of ABC. The company believes that the attainment of pre-acquisition ROE levels is possible over the longer term through continued earnings growth and selective share repurchase. Capital Structure Disney shareholders benefit from the realignment of the company's capital structure resulting from $9 billion in new debt incurred in the ABC transaction. Attractive borrowing rates, as well as the favorable tax treatment of debt financing, have substantially reduced the company's overall cost of capital and help to create value for shareholders.
Despite the debt associated with the acquisition, Disney still has the financial flexibility to borrow prudently should sound business opportunities present themselves. As measured by pro forma earnings before interest and taxes (EBIT) to interest expense, the company covered its interest costs by a healthy factor of five times for the year ended September 30, 1996. The company monitors its cash flow, interest coverage and its debt-to-total capital ratio with the long-term goal of maintaining a strong single-A or better credit rating. Standard & Poor's/Moody's rate Disney's long-term debt A/A2 and its short-term debt Al/Pl. Additionally, as part of its overall risk management program, the company evaluates and manages its exposure to changes in interest rates on an ongoing basis. Cash Flow As-reported cash flow from operations passed $4.6 billion this year, a 32% increase over prior year.
This strong cash-generating performance was due in part to the high levels of cash flow contributed over just a partial-year period from several of the company's new broadcasting-related businesses, such as its owned television stations and ESPN. Over the past five years, Disney has generated total cash flow from operations of close to $15 billion, most of which has been reinvested in the company's core businesses, in acquisitions and new initiatives and in selective share repurchase. Another measure of cash flow, earnings before interest, taxes, depreciation and amortization (EBITDA)—which does not reflect an add-back for amortization of film and television costs, consistent with convention in the entertainment industry—also grew in 1996. Although Disney has consistently grown its EBITDA over the last five years, the company believes EBITDA is a less useful measure of overall financial performance than pro forma earnings before goodwill. As stated earlier, Disney finds that pre-goodwill earnings, unlike EBITDA, better reflect the "real" costs of depreciation and interest expense associated with a company's capital spending activities and leverage. In 1996, approximately $235 million, or just 5% of total cash flow from operations, was spent to maintain existing assets. The remaining $1,510 million of reported 1996 capital spending was used to fuel Disney's growth by expanding the company's existing businesses, such as new theme park assets and more Disney Stores, and through investment in new initiatives, including Disney's Animal Kingdom and Disney Cruise Line. In order to build value for shareholders, Disney's priorities for use of its substantial cash flow continue to be investment for attractive return in new and existing businesses and opportunistic repurchase of its own shares, before the accelerated repayment of any of its indebtedness.
Repurchase of Shares Disney invested $462 million in its own stock in fiscal year 1996, repurchasing 8.2 million shares at an average price of $56-1/2. Since 1985, Disney has invested a total of $2.2 billion to buy back 84.4 million shares at an average price of $25-1/2. Since 1990 the company has invested $2 billion to buy back 55.6 million shares at an average price of $35-3/4, thereby creating additional value for shareholders. Measured as of November 30, 1996, these shares were worth $6.2 billion and $4.1 billion, respectively. As of the end of fiscal 1996, Disney had authorization to repurchase an additional 96.3 million shares. Balance In 1996, 44% of Disney's pro forma operating income was generated by the Creative Content segment, with the remainder almost evenly divided between Broadcasting (29%) and Theme Parks & Resorts (27%).
This balanced operating income mix lessens the exposure of the company as a whole to volatility or cyclicality in any single business and significantly reduces risk, assisting the company in the pursuit of its long-term earnings growth objective. At the same time, the company generates revenues from more countries each year as Disney and its brands are welcomed around the world. This year, for example, The Disney Store opened its doors for the first time in Australia, ESPN debuted in India and The Disney Channel gained new subscribers in the United Kingdom. As a result, in 1996 on an as-reported basis, revenues from international sources reached a new high of $4.3 billion, or 23% of total company revenues.
As Disney continues to explore and expand the worldwide potential of its products and services, it benefits from an ever-decreasing reliance on any single country or region's economic health for its financial well-being and success. And, as in the past, the company continues to monitor and manage its economic exposure to foreign currency fluctuations as part of its overall financial risk management program. Dividends and Total Return to Investors In January 1996, Disney's Board of Directors voted to increase the company's quarterly dividend by 20% —as it has each year since 1988—from 9¢ to 11 ¢ per share. Over that time, Disney's annual dividend has grown at a rate 3.6 times faster than that of the Standard & Poor's 500. As a result of Disney's financial performance and earnings per share growth over the past decade, driven by expansion of existing businesses, investment in new businesses and share repurchase, the return to long-term investors in Disney stock has surpassed the return delivered by the market overall, as measured by the Standard & Poor's 500. An investment of $1,000 in Disney stock on November 30,1986—including reinvestment of dividends—was worth $7,265 on November 30,1996, providing a 22% compound annual return. A similar investment in the Standard & Poor's 500 would have been worth $4,113 over the same timeframe, representing a 15% annual return to investors.
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