Image source: SeaWorld Entertainment.
SeaWorld Entertainment (SEAS 2.50%) began the week as the highest-yielding stock in the theme park industry. It will wrap it up at the bottom. The struggling operator of marine life-themed attractions announced that it would be suspending its dividend after Monday's market close.
Just like ending its orca breeding program and killer whale performances, SeaWorld is taking a gradual approach. It will reduce the quarterly distribution of $0.21 a share to $0.10 for the payout going out next month. It will then suspend the disbursements entirely in 2017.
SeaWorld argues that the money is better spent on stock buybacks and theme park attractions. There's a savory logic to that, especially when its stock is trading as low as it is these days. It can certainly buy more shares now with the stock near new lows than it could have when it went public at more than twice today's price three years ago. Investing in new rides means heavy capital expenditures, but it's a sound strategy as it tries to wean itself off controversial marine life shows.
It's a smart move, but the market's even smarter in pulverizing the stock as its initial response.
Wishing whale
The trend of thrill ride havens offering surprisingly buoyant quarterly payouts started with Cedar Fair (FUN +0.00%), distributing the lion's share of its earnings as a limited partnership. When Six Flags (SIX +0.00%) emerged from Chapter 11 bankruptcy in 2010, it followed Cedar Fair's lead with healthy distributions.
Cedar Fair and Six Flags on the market with fat dividends likely pushed SeaWorld to do the same when it went public in 2013. Park operators rivaled utilities and REITs in the pursuit of income investors before SeaWorld's announcement after Monday's market close. Let's size up the yields.
- Cedar Fair: 5.4%
- Six Flags: 4.4%
- SeaWorld: 6.6% before, 0% after next month's final distribution
SeaWorld's yield was the lowest of the three operators two years ago. The tables have turned as a result of SeaWorld's falling stock price and dividend hikes at Cedar Fair and Six Flags. This could have made SeaWorld's beefy rate magnetic to yield chasers, but that's not going to happen now. SeaWorld may be right about buying back stock as a preferable way to return money to shareholders at this point. It will prop up earnings per share if and when the out-of-favor park operator returns to favor. However, it's going to send conservative investors or those who stuck around for the payouts scurrying for the exits. Those quarterly incentives to stick around are gone.
The move is also a morale crusher. Many employees already felt betrayed when SeaWorld announced in March that it would end its orca breeding program, winding the clock on the eventual end of killer whales at its parks. Now the market has to wonder about SeaWorld's financial stability. Some brands and companies never recover from a suspended dividend.
The timing of the move is problematic. Attendance inched slightly higher for all of 2015 and again during this year's first quarter. Then came a rough second quarter with attendance taking an 8% hit. If it was a blip, would SeaWorld really be stopping the dividend check-printing presses?
This is a gamble that can pay off only if SeaWorld redirects a good portion of the suspended dividends into rides that prove magnetic to tourists. A turnaround in turnstile clicks would then be magnified as a result of the proposed stock buybacks. Nixing its payouts forces SeaWorld to be seen by the investing community as a growth stock. Your move, SeaWorld: Grow.
