The Meanest 10% Yield in the World

Friday, November 6, 2009 - 2:32pm

by Tom Hutchinson

High dividends are a great way to generate cash flow and increase total return in an uncertain market.

But where can an investor find companies that make enough money to support a high dividend in a rough economy?

One place to look is the entertainment industry. In times of financial hardship, people tend to seek an escape from the harsh realities of life.

During the Great Depression, for example, the movie industry proved to be remarkably resilient. Before the 1929 market crash, some 90 million people were going to a show every week. The number initially fell off, but movie attendance recovered. By the middle of the Depression, 80 million moviegoers were lining up every week.

The need for entertainment and a little escape remained buoyant even as most other industries suffered mightily.

In the aftermath of this financial crisis, with unemployment hovering at about 10%, many people are finding their escape with another form of entertainment. This time it's not the silver screen, it's the over-the-top theater of professional wrestling.

World Wrestling Entertainment (NYSE: WWE, $14.65) is the dominant player in the outlandish world of professional wrestling. Professional wrestling is one part sport and one part maniacal theatrics, but it's a 100% serious commercial enterprise. It's Big Business with a capital B.

WWE is an integrated media company that broadcasts in more than 145 countries in 30 languages to more than 500 million people worldwide. Through television programming, pay-per-view, digital media and publishing; WWE brings wrestling to an intensely loyal fan base and is one of the world's most popular entertainment brands.

Here are a few more facts.

WWE broadcasts reach 16 million U.S. viewers each week and millions more internationally. It holds more than 300 live events that attract more than two million fans every year. The company has more than 160 consumer-product licenses and sells products in more than 50 countries. It also operates studios that produce films, DVDs and TV shows. The company's big annual event "WrestleMania" outdrew the 2004 Super Bowl in attendance last quarter.

Did I mention the stock is yielding a phenomenal 9.8%?

In the past few years WWE has been firing on all eight cylinders. Revenues soared from $263 million in 2006 to $526 million in 2008. While resilient, WWE has not been immune to the slow economy. Despite its strong gross margin of 45%, revenues slid -15.6% in the first half of 2009 from their year-ago levels. Aggressive cost-cutting pushed operating income +17% higher in the period. And, astoundingly, earnings per share in the first half of 2009 increased to $0.41 from $0.37 in the first half of 2008.

While earnings and profit remain solid, a major question surrounding WWE is the dividend's sustainability. The company pays $1.44 in quarterly payments of $0.36, which gives the shares a serious 9.8% yield. The company has never cut its dividend, and it has raised the payout four times since 2004. This is a good record but not a perfect one, as WWE's dividend in the first half of 2009 exceeded its earnings. Its payout ratio in the first half was 176%.

But there's more to the story.

The McMahon family which owns about 65% of outstanding shares only receives $0.24 a quarter versus $0.36 for the rest of the shareholders. Also, in the first half of 2009, WWE generated $75 million in operating cash flow, which easily covered $41 million paid in dividends. And, the company's balance sheet is rock solid. As of the end of the second quarter, WWE had virtually no debt and $163 million in cash.

A leaner and meaner WWE after cost cuts combined with an improving economy should boost earnings in the upcoming quarters. The dividend appears secure for the time being. Higher earnings and a sky high yield make WWE a keeper.

Tom Hutchinson does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.