Even when the company was making a decent amount of money, World Wrestling Entertainment (WWE +0.00%) paid out a bigger dividend than its overall profit. Now, the company has seen its 2013 earnings fall to almost nothing and profits turn to losses in the first two quarters of 2014, yet it's still paying a dividend.
In the second quarter WWE reported a net loss of $14.5 million, or $0.19 per share, down from a profit of $5.2 million, or $0.07 per share, in the second quarter of 2013. In both of those quarters the company paid a $0.12-per-share dividend despite the fact that even in the profitable quarter, the company's profit did not cover the payout.
WWE has cut its dividend in recent years -- from a $1.44 annual payout to $0.48 per year starting in 2011 -- but it has steadfastly maintained the payout.
Paying a dividend has been WWE's practice since the company went public in 1999, which has slowly drained its cash on hand. Paying out more than you're taking in over a long period of time ultimately results in insolvency and it's not a practice WWE can maintain forever. Either the company needs to make a lot more money or it needs to stop offering a dividend because at some point -- perhaps soon -- there simply won't be enough cash left to continue the practice.
WWE CEO Vince McMahon Source: WWE
Why is WWE doing this?
In 2012 and 2013 the company paid a $0.12 dividend per share per quarter for both its Class A and Class B common stock (which is held by CEO Vince McMahion and his family) -- more money than it made per share during both years. This practice, while legal, has seen the company slowly deplete its cash on hand. Though total revenue has inched up for each of the last five years, cash on hand has declined.
| Year | 2013 | 2012 | 20111 | 2010 | 2009 |
|---|---|---|---|---|---|
| Net revenue (millions) | $508.00 | $484.00 | $483.90 | $477.70 | $475.20 |
| Net income (millions) | $2.80 | $31.40 | $24.80 | $53.50 | $50.30 |
| Cash on hand (millions) | $109.40 | $152.40 | $155.80 | $166.90 | $208.20 |
Some of that was due to increased expenses related to the company's over-the-top digital streaming network, but the dividend has been a steady drain that makes little sense while WWE is losing money. The dividend costs the company around $9 million a quarter if it's maintained at the current rate.
Total revenues for the six months ended June 30, 2014, were $281.9 million compared to $276.3 million in the prior year. That resulted in a net loss of $22.5 million ($0.30 a share) for the six-month period versus a profit of $8.2 million ($0.11 per share) during the same period of the previous year. So even in 2013, when things were going reasonable well, WWE could not afford to pay $0.12 per quarter when at best it was making $0.11 cents per share for two quarters.
Ben Miller, who writes for The Wrestling Observer, a respected industry publication, told the Fool via email that he believes the company is committed to the dividend even though it can't afford to keep paying it if current business conditions don't change.
"WWE's dividend has been a point of criticism for such a long time that at this point it seems to be an article of faith," Miller wrote. "They believe that their shareholders should be rewarded whether the stock increases or not, and they seem willing to go to the wall for that belief."
How long can this continue?
If the company can't start making a large enough profit to cover its dividend it may have to drop it, even though it technically has a borrowing mechanism in place that would fund it. The company explained its revolving $200 million credit line as follows in its annual report:
The revolving credit facility restricts our ability to pay dividends if a default or event of default has occurred and is continuing thereunder, if our consolidated leverage ratio (as calculated under the revolving credit facility) exceeds 2.8:1.0 or if our consolidated fixed charge coverage ratio (as calculated under the revolving credit facility) does not exceed 1.25:1.0. As of December 31, 2013, we are in compliance with the provisions of the revolving credit facility and are not restricted from paying dividends to our stockholders.
That's a very technical way to say that the company can borrow money to pay the dividend. WWE does note in the report that the Board of Directors determines the dividend on a quarterly basis and that it "cannot assure our stockholders that dividends will be paid in the future, or that, if paid, dividends will be at the same amount or with the same frequency as in the past."
Should WWE end the dividend?
While dropping the dividend would likely have negative consequences on WWE stock, so would running out of money. The company has been aggressively slashing costs to lower its breakeven point. This has included cutting about 55 employees, eliminating its money-losing magazines division, and exploring doing some "Supershow" tapings which save money by shooting Raw and Smackdown on the same night, according to Wrestling Observer.
The company has also scaled back original content for its network while moving up the timetable for rolling it out around the world. That should help return the company to profitability, but it's a leap to suggest that reducing the work force by 7% and scraping up what the company describes as $10 million in additional expenses in 2014 will be enough to cover the dividend.
Existing operations do not support the dividend and they are unlikely to any time soon. Because of that WWE needs to stop giving away money it's not making and suspend the dividend until it has replenished its cash on hand and generates enough of a profit to cover the cost.
