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Is WWE’s Dividend in Danger?

I couldn’t tell you the last time I watched professional wrestling; it probably was in the 1980s when I was a kid. But more than 1.8 million viewers tuned in for World Wrestling Entertainment’s (WWE ) latest edition of its famed WrestleMania pay per view. That’s a lot of eyeballs and just goes to show how big the “sport” has grown since its humble beginnings decades ago.

WWE has grown in both viewership and earnings.

The problem is that the dividend just isn’t. Cash flows remain anything but robust for the sports entertainment and media company, a fact that perhaps remains hidden by WWE’s relatively low dividend yield of 2.86%.

For investors, the key for WWE is making sure that its recent string of torrid growth keeps up with its cash needs. Otherwise a nasty dividend cut could be on the horizon.

The Good News at WWE

On the surface, there’s plenty to like at WWE.

It’s the dominant provider of sports entertainment; no one else really does wrestling, and that position as the leader lends itself to a pretty rabid fan base. More than 101,700 fans were in attendance this Sunday for the previously mentioned WrestleMania event. That’s the highest attendance record since 1987 when wrestlers like Hulk Hogan were battling it out in the squared circle.

The same rapid fan base is willing to pay $9.99 per month for a 24-hour subscription to the WWE Network. The streaming service, which was only launched two years ago, now counts over 1.8 million users. It’s the most followed sports channel on YouTube and the second most-followed sports brand on Facebook (FB ).

There’s no doubt that wrestling has become immensely popular.

And wherever you have a rabid fan base, you have some pretty big dollars being spent. Aside from the viewership subscriptions, there’s magazines, websites, and licensed toys and products to buy. All of this produces pretty decent earnings growth for such a small company.

WWE’s long-term average earnings growth rate has been 20%, with current estimates for earnings growth coming in at 18.4%. WWE’s own earnings estimates peg the company at the high end of its range for the full year. Full year, adjusted operating income before depreciation and amortization should come in approximately $70 million to $85 million.

Here’s the Suplex to the Head

All that growth is great news and should propel the stock forward in the future. The problem is in the now. WWE is simply outspending what it takes in, and unfortunately the crux of that spending is its dividend.

Right now, WWE has a payout ratio of roughly 150%. Anything above 100% means that a company is using cash or debt to keep its dividend juicy. Sometimes, a payout ratio can jump temporarily as a new project eats up cash flows or there is a one-time item.

But that’s not the case at WWE. Last year, the firm made $25 million in net income. However, it paid out $36 million in dividends. The difference was made up by a drop in the firm’s cash holdings.

This isn’t the first time that WWE has outspent its cash flows and earnings. It’s actually been doing this every year since 2011 when it cut its dividend down from $1.44 per share to the current 48-cent payout. All along the way, cash on hand has been dropping, and dropping, and dropping. Back in 2011, that number sat at $155 million. Today, cash on hand is around $47 million. So if the trend keeps up, WWE could be looking at another dividend cut, or worse, an outright suspension.

Avoiding WWE for Now

As a growth stock, WWE does have some interesting points; rising subscriber numbers, an entrenched moat, and its huge cast of valuable characters makes it an interesting portfolio choice. But as an income play, it’s just not one I would want to own.

Unless those growth elements really start ramping up cash flows and real earnings at WWE, its dividend is shaky at best. The only thing going for WWE’s dividend is that founder and CEO Vince McMahon uses it as a way to extract “profits” and cash from his creation. He’ll keep it going for as long as possible before cutting it.

Either way, WWE is a stock that dividend hunters should avoid for now. It needs to start actually earning what it’s paying out before investors needing income take the plunge. Otherwise, they risk getting a Stone Cold Stunner.