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Published: November 6, 2009
High dividends are a great way to generate
cash flow and increase total return in an uncertain market.
But where can an investor find companies that make enough money
to support a high dividend in a rough economy?
One place to look is the entertainment industry. In times of
financial hardship, people tend to seek an escape from the harsh
realities of life.
During the Great Depression, for example, the movie industry
proved to be remarkably resilient. Before the 1929 market crash,
some 90 million people were going to a show every week. The
number initially fell off, but movie attendance recovered. By
the middle of the Depression, 80 million moviegoers were lining
up every week.
The need for entertainment and a little escape remained buoyant
even as most other industries suffered mightily.
In the aftermath of this financial crisis, with unemployment
hovering at about 10%, many people are finding their escape with
another form of entertainment. This time it's not the silver
screen, it's the over-the-top theater of professional wrestling.
World Wrestling Entertainment (NYSE: WWE, $14.65) is the
dominant player in the outlandish world of professional
wrestling. Professional wrestling is one part sport and one part
maniacal theatrics, but it's a 100% serious commercial
enterprise. It's Big Business with a capital B.
WWE is an integrated media company that broadcasts in more than
145 countries in 30 languages to more than 500 million people
worldwide. Through television programming, pay-per-view, digital
media and publishing; WWE brings wrestling to an intensely loyal
fan base and is one of the world's most popular entertainment
brands.
Here are a few more facts.
WWE broadcasts reach 16 million U.S. viewers each week and
millions more internationally. It holds more than 300 live
events that attract more than two million fans every year. The
company has more than 160 consumer-product licenses and sells
products in more than 50 countries. It also operates studios
that produce films, DVDs and TV shows. The company's big annual
event "WrestleMania" outdrew the 2004 Super Bowl in attendance
last quarter.
Did I mention the stock is yielding a phenomenal 9.8%?
In the past few years WWE has been firing on all eight
cylinders. Revenues soared from $263 million in 2006 to $526
million in 2008. While resilient, WWE has not been immune to the
slow economy. Despite its strong gross margin of 45%, revenues
slid -15.6% in the first half of 2009 from their year-ago
levels. Aggressive cost-cutting pushed operating income +17%
higher in the period. And, astoundingly, earnings per share in
the first half of 2009 increased to $0.41 from $0.37 in the
first half of 2008.
While earnings and profit remain solid, a major question
surrounding WWE is the dividend's sustainability. The company
pays $1.44 in quarterly payments of $0.36, which gives the
shares a serious 9.8% yield. The company has never cut its
dividend, and it has raised the payout four times since 2004.
This is a good record but not a perfect one, as WWE's dividend
in the first half of 2009 exceeded its earnings. Its payout
ratio in the first half was 176%.
But there's more to the story.
The McMahon family which owns about 65% of outstanding shares
only receives $0.24 a quarter versus $0.36 for the rest of the
shareholders. Also, in the first half of 2009, WWE generated $75
million in operating cash flow, which easily covered $41 million
paid in dividends. And, the company's balance sheet is rock
solid. As of the end of the second quarter, WWE had virtually no
debt and $163 million in cash.
A leaner and meaner WWE after cost cuts combined with an
improving economy should boost earnings in the upcoming
quarters. The dividend appears secure for the time being. Higher
earnings and a sky high yield make WWE a keeper.
-- Tom Hutchinson
Staff Writer
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