Maybe this 6% Yield is Sustainable After All?

By Chad Henage - August 14, 2012 | Tickers: DWA, LYV, NFLX, DIS, WWE | 0 Comments

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I've written before about a long time hobby of mine, and that is watching professional wrestling. The only company worth mentioning in this space is WWE (NYSE: WWE). Since the company took over WCW years ago, while there are are other wrestling promotions no one really is in the same league. The company lost some investors when they had to cut their dividend, and I've even recently questioned whether the lower dividend was sustainable. After looking at the company's most recent earnings report, I'm actually shocked to say this 6% yield could be sustainable after all.

Live and Televised Entertainment:

The company's current quarter was sort of a mixed bag of results. By far, the company's largest profit generator is their Live and Televised Entertainment division. In fact, most people have been exposed to WWE through their television shows and pay-per-views. There were multiple positives reported from this critical unit of the company. Revenue increased by 5.97%, and pay-per-view revenues increased 19%. The company's most important pay-per-view event each year is WrestleMania. This year the event saw an 8% increase in paid attendance, along with a 28% increase in average ticket price. Considering the state of the economy, it's impressive that an entertainment company could increase paid attendance by a significant rate with such a large increase in pricing. This shows that fans of the brand are willing to pay up to be a part of the company's biggest event of the year.

Consumer Products:

Consumer Products results were extremely disappointing. With revenue down over 25%, licensing revenue down 45%, and toy royalties down 12%, there wasn't much for fans of WWE to cheer about. The only positive I could find in this division was the company's home video revenues which increased 4%. Part of the reason that licensing revenues decreased, was the decision to not refresh the company's game console title WWE All-Stars. Having one primary video game title released once per year isn't going to cut it. The company's toy licensing also could be increased. New stars have been introduced, yet consumers have seen virtually nothing utilizing these new characters.

Digital Media:

WWE Digital Media saw significant growth across the board. Overall revenue increased almost 26% driven by WWE.com revenues up over 40%, and WWEShop revenues up 7.14%. Given the huge amount of content available in the WWE vault, this is a division that in my estimation the company is underutilizing. The company has licensed multiple feature shows to Netflix (NASDAQ: NFLX). However, the company has the opportunity to strike a unique licensing agreement with Netflix that would benefit both companies tremendously. WWE already licenses the Friday night WWE Smackdown program to Hulu. However, fans that want to watch WWE RAW, only have a few options. Small segments are available on WWE.com. I would suggest that WWE look at licensing the RAW program to Netflix. This would give Netflix an attractive option to draw in new subscribers, and would address an issue of Netflix not having current content. This would also be a huge win for WWE, giving fans a prime way to watch action they would otherwise miss. While this is just one idea, it is a good example of the licensing possibilities available to the company.

Financials:

Cash and short-term investments increased by over $14 million, driven by operating cash flow which increased over 60%. Free cash flow was roughly $13 million, and the company paid just less than $9 million in dividends. The sustainability of the companies payout has been an ongoing concern. From June 2011 through December 2011 the company paid out more in dividends than it brought in through free cash flow. This trend reversed in March 2012 with a less than 47% free cash flow payout ratio, and the current quarter's ratio of about 67% shows good progress towards financial stability. In addition, the company now expects that its EPS will be, “roughly 5% to 15% above our 2011 results.” For investors who were concerned about the company's ability to grow, this has to be reassuring news.

Competition & Conclusion:

Some of the company's competitors are conglomerates like Walt Disney (NYSE: DIS), Dreamworks (NASDAQ: DWA), and Live Nation (NYSE: LYV). While each of these companies fills a unique niche, they all compete for consumer entertainment dollars. Live Nation produces live music events and is probably WWE's most direct competitor. Consumers that choose to pay for concert tickets are not likely to also attend a WWE live event. While Live Nation is expected to grow earnings at 21%, analysts don't expect positive earnings until 2013. With no current yield, if Live Nation doesn't meet these growth projections, investors may be very disappointed. Where DreamWorks is concerned, the company also pays no current yield, and is actually expected to grow slower than WWE. Since DreamWorks and WWE sell for almost the same forward P/E ratio, if WWE's 6% yield is sustainable it would be the better value. This leaves Walt Disney, which probably is the only true competitor for investors' dollars. The company is currently expected to grow faster than WWE and pays a current yield of about 1.2%. As an added bonus, Disney's forward P/E ratio is about 16.5 versus over 21 at WWE. While there's no doubt that Walt Disney is a much larger and well-established company than WWE, with a recovery in the economy continuing both of these corporations should benefit. With WWE moving their most popular program from 2 to 3 hours, and introducing a new show on ION television, revenues in the company's televised entertainment division will certainly increase. With the possibility of a sustainable 6% yield, this entertainment company could be a good value.

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