Last week, World Wrestling Entertainment (NYSE: WWE) reported its Q1 results. Above all, investors interested in this business look at one thing: cash flow. Why? Take a look at WWE's dividend yield.
As of Tuesday's close, the stock was yielding almost 13%! That's high. And a high dividend yield often indicates that a dividend cut may be in the offing -- the theory being that if the yield were sustainable, then buyers would rush in, and their activities would eventually lower the yield by driving the price higher.
Well, WWE hasn't had a great time of it when it comes to cash flow. I found this out when I examined the company's third quarter. Net cash from operations, unfortunately, has been overpowered at times by the dividend obligation. In fact, according to the Q4 report (pdf file), operational cash flow for 2008 dropped significantly to roughly $36 million, and the dividend obligation was over $80 million.
And that was before capital investments. That's sort of like the Undertaker throwing Mankind off the top of a steel cage. In other words, it's not pretty, folks.
Things did improve in the latest quarter, though. WWE generated over $47 million from operations, and most of that became free cash flow since there wasn't a heavy capital-spending need in Q1. This more than covered the dividend obligation of about $20 million.
As management stated, some positive timing issues helped out. But the question is: Can WWE keep it up? Will cash flows be enough to keep the current payout going?
That's what I've been wondering about a lot lately because I really would like to invest in WWE. I'd love to have exposure to the media industry and get paid a generous percentage of the spoils. Heck, investing in Disney (NYSE: DIS) certainly doesn't get you a nice yield.
One thing about the earnings picture that I don't like is that both revenues and earnings per share are down. Sure, cash flow may have improved, but when you combine timing issues with a drop in income and juxtapose that with WWE's dividend yield, you've got to pause and really look at the situation. I mean, reporting a nearly 50% drop in per-share profit just doesn't inspire a lot of confidence.
Yet, the stock has held up relatively well. As of Tuesday's close, it was priced at $11.28. That represents a nice bounce off the 52-week low of $8.76, a level that was hit back in November of last year. And WWE seems confident about its dividend for the most part.
I'm torn here. I want to get in on this yield, but I just can't get myself to pull the trigger. Maybe I will gather together some courage in the near future. I guess I'll have to wait for more data from future quarters. One thing's for certain though: if the stock dips below $10 per share, then I'll definitely have to take a very close study of the situation and maybe jettison my reservations. I hope WWE will make my decision easier.
So, come on Vince McMahon! Bring up the ratings on your programming, improve the buy rates on your pay-per-views, and, most importantly of all, show me the cash flow!
Disclosure: I own Disney; positions can change without notice.
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