You have to give Vince and Linda McMahon a lot of credit. They basically found a way to transfer the age-old concept of Greek theatre into a sport and a brand — World Wrestling Entertainment (WWE) that has captivated audiences for decades.
Back in the 1980’s, André the Giant, Hulk Hogan and others were able to turn wrestling into events that sold out massive auditoriums, creating movie stars out of the best of them. The company has expanded into kids entertainment and licensed content for television.
There’s no lack of brand awareness, the casting is fantastic, and the shows have always entertained. As the company stated in a press release:
“WWE programming is broadcast in more than 150 countries and 30 languages and reaches more than 650 million homes worldwide. The company is headquartered in Stamford, Conn., with offices in New York, Los Angeles, Miami, London, Mumbai, Shanghai, Singapore, Istanbul and Tokyo”.
The business is profitable, but it just isn’t growing anymore. I suspect the audience for the company’s products remains relatively stable — as some folks age out, younger ones age in. So there’s income and cash flow, but that’s where the good news ends. Part of the problem is that WWE is not a full-fledged entertainment conglomerate like Walt Disney (DIS), nor does it offer a product that solves a problem.
In the quarter just reported, revenue was up 7.5% but adjusted EPS was down 56%. EPS was apparently affected by increased costs due to new initiatives, like opening a new “performance training facility”. There was also a $4.7 million film impairment charge, which is the price of making movies yourself. The shows remain popular, however, as new TV programs increased North American revenues 13%. The event venues pull in some nice coin, up 28% to $7 million, and pay-per-view still pulled in $37 million, although that’s down from $40 million last year.
The company now stands with $123 million in cash and investments, but cash flows are getting hammered. Last year at this time, the company had operating cash flow of $44.7 million, offset by $17.5 million in capex. This year, operating cash flow is so far at only $5.9 million, offset by $13.1 million in capex.
One of the reasons WWE was initially a favorite among many investors was the nearly 10% dividend it paid a few years back. That dividend got cut, and now stands at 4.6%. That’s still a very nice payout, but I’m skeptical about the sustainability. If you glance back at the cash flow statements, you’ll see that for the past three years, dividends paid were vastly in excess of free cash flow (operating cash less capex). That hasn’t changed, as $18 million in dividends far exceeds the negative $7 million in negative free cash flow.
I think another dividend cut is in store, which will impact the stock price. But there’s another factor at work, too. I’m normally a big fan of big insider ownership, because it aligns management’s interests with shareholders. But the McMahons control 80% of the voting rights, and that means they don’t even have to listen to shareholders.
I just wonder how long the stock will stay afloat. I know that’s likely to upset management; I just hope they don’t send any of the big bad wrestlers to beat me to a pulp.
As of this writing, Lawrence Meyers was long DIS. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.