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Every year since going public, World Wrestling Entertainment has paid a dividend. Often times, the yield on that dividend was quite high. But in 2011, the company was forced to slash its payout by two-thirds. Today, investors can get a respectable 2.5% from the stock.
But how safe is that now-lower yield? Surprisingly, it's not safe at all.
It's all about free cash flow
At the end of the day, free cash flow (FCF) is the best metric we have to keep track of how much money a company is able to bring in from its business in any given year. It is calculated by subtracting capital expenditures from the amount of cash generated from operations. Ideally, it is from FCF that dividends are paid out.
But as you can see below, WWE has been paying out far more in dividends -- even since slashing its payout -- than it takes in from FCF. In only one year -- 2014 -- was there any cash left over after paying shareholders.
Data sources: Yahoo! Finance, SEC filings
No figures are included for 2013 because that year, the company was actually FCF negative on the year. And if you click on the second tab, you can see that the amount of cash WWE has on hand has fallen by over 40% since 2012.
Why would any company do this?
If the company is bleeding cash via its dividend, it would make sense to reduce -- or suspend -- it. So why does the payout continue?
Though its impossible to know for sure, one more sinister explanation is that founder and CEO Vince McMahon is using the dividend to enrich himself. He and his family own virtually all of the company's Class B Shares. That means, annually, the McMahon family receives over $20 million in dividends from their ownership.
The topic, however, seems to be avoided by most. During the company's most recent conference call, the word "dividend" wasn't even mentioned -- by management or analysts. And over the past 12 months, the dividend has only been discussed once. In February, CFO George Barrios said, "[the dividend] is something the Board regularly discusses."
Where that leaves investors
Clearly, I think you should stay away from WWE if you're thinking of buying it for its dividend. The company's results clearly show that it does not generate the type of FCF necessary to continue paying the dividend out at current levels.
Even more troubling, while sales have improved and the company enjoys a robust following, the dividend is fragilizing the company. As cash continues to fall, the company will eventually need to make a choice between the payout and the future of WWE. I wouldn't want to be holding shares when that decision comes.
The article How Safe Is World Wrestling Entertainment, Inc. Stock? originally appeared on Fool.com.
Brian Stoffel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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