Destined for Another Dividend Cut

By Chad Henage - March 26, 2012 | Tickers: DIS, WWE | 0 Comments

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I am a wrestling fan. There I've said it. You can now commence the ridicule and laughing. No really, I'm a wrestling fan and I have been since the 1980s. I grew up hanging out with friends watching Hulk Hogan, Jake the Snake, the Ultimate Warrior, Road Warriors, and the Hart Foundation just to name a few. I only point this out up front, to make sure that no one thinks I'm just writing this because I don't like wrestling. I enjoy the storylines and the characters. Here is the problem, WWE (NYSE: WWE) fans, your dividend, which was already drastically reduced, is about to get cut again. Like a Rock Bottom (wrestling move to the uninitiated), this dividend is going down.

The issue quite simply is WWE doesn't make enough on a consistent basis to keep paying this dividend. I know you thought the pain was over when the last cut was announced, but it's not over. Take a look at what could happen to WWE's payout ratio if they meet revenue and earnings estimates for full year 2012:

(all numbers in thousands except cash payout ratio)

(*Estimates using average analyst revenue expectations. Free cash flow assumes a 7% conversion rate. WWE converted between 4.5% and 9% of revenues into cash flow in the June, Sept., and Dec. 2011 quarters respectively. I've adjusted the December results to strip out the $12 million one time write down WWE took.) 

You can see the issue right away. WWE in the last 3 quarters, has paid out an average of 129% of its free cash flow in dividends. Going forward, only the pop the company gets from Wrestlemania will prevent each of the next four quarters from having the same problem. I've made the argument in the past, that WWE could be a good turnaround play based on the economy improving. I believe that could happen, but the company cannot afford to keep its current dividend and make this turnaround happen.

Realistically, the company can probably afford about about $5.6 million a quarter in dividends. In the table above, WWE would average about $8 million a quarter in free cash flow. Paying $5.6 million in dividends, would give the company a 70% free cash flow payout ratio. This would be low enough that the company could still invest for future growth. This would represent a dividend of about $0.30 per share giving the company a yield of 3.40% at current prices. Since the market seems to price the stock with about a 5% yield, this would likely mean a drop off in the share price to about $6. Sorry WWE shareholders, but that seems to be your fate. A dividend cut, either preceded by, or followed by, a drop in the stock price of about 32% from current prices.

If you are looking for an alternative in the entertainment industry to avoid the future pain in WWE stock, I would give Walt Disney (NYSE: DIS) a look. It might sound strange to switch from investing in wrestling to Walt Disney, but “the mouse” has something that WWE doesn’t have – plenty of free cash flow. Disney generated about $4.6 billion in free cash flow in the last 4 quarters. This was enough to pay their dividend (about $756 million), and to repurchase about $4 billion worth of shares. You get a company that is selling for less than 15 times earnings, and expected to grow at 12.46%. Disney's dividend yield is just 1.38% at current prices, but it is extremely well covered. In addition, Disney has been raising its dividend by about 8% over the last 5 years. A dividend increase is something WWE shareholders won't see for quite a while I'm afraid.

Sorry WWE fans, but in the battle between Randy Orton and Mickey, I'll take Mickey every time.

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