World Wrestling Entertainment, Inc. (WWE) announced plans to expand beyond wrestling and rebrand itself simply as "WWE" this week. I guess that's pretty interesting, but not nearly as interesting as a small change at the bottom of the company's press release that caught my eye.
It's fairly well known that, while WWE's stock carries an unwieldy dividend yield of more than 11%, the stress on the company's cash flow is substantially mitigated by founder Vince McMahon and his family taking a smaller dividend on their shares. When the company raised its quarterly dividend by 50% back in 2008, the McMahons waived the increase on their Class B shares. This was a big deal, essentially evening the total amount distributed to Class A and Class B shares each quarter despite Class B shares accounting for more than 60% of the common shares outstanding.
The gesture has been great for Class A shareholders to this point. While the dividend was never sustainable over the long run, the waiver prolonged WWE's ability to carry a dividend rate that exceeded its earnings, providing shareholders with a fat yield in the short term. Unfortunately, the very bottom of today's press release signals an end to all that. Here are the final five sentences (emphasis mine):
In addition, our dividend is significant and is dependent on a number of factors, including, among other things, our liquidity and historical and projected cash flow, strategic plan (including alternative uses of capital), our financial results and condition, contractual and legal restrictions on the payment of dividends, general economic and competitive conditions and such other factors as our Board of Directors may consider relevant, including a waiver by the McMahon family of a portion of the dividends which has now expired. Any new dividend waiver is subject to two things. The first is the receipt of the approval of the Internal Revenue Service, which has been obtained. The second is the agreement of members of the McMahon family. No determination has been made by the McMahon family to enter into a new waiver agreement.
In other words, the waiver agreement had a three-year shelf life, and while the IRS has granted approval for the McMahons to continue waiving a portion of the dividend, the family hasn't made a decision yet. I looked back at the company's SEC filings from 2008, and sure enough this 8-K from February contains the only mention of the waiver expiring after three years. It's no coincidence that the passage above just started appearing in WWE press releases in March of this year.
The passage also appears in WWE's 2010 annual report -- released last month -- as part of a much larger paragraph. The additional information can only be interpreted as a warning shot fired to shareholders:
We 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. Any reduction in our dividend payments could have a negative effect on our stock price. Over the last three calendar years, the company’s cumulative dividend payment totaled $247.3 million and its cash from operating activities less net purchases of property plant and equipment totaled $152.2 million.
That's not good. The first sentence is the standard rear-covering that comes along with most dividend announcements, but the rest? It's laying the foundation for a future cut by justifying the logic ahead of time. It essentially translates to, "Look, we paid you guys more than we made over the last three years. That's obviously not sustainable. So don't say we didn't warn you when we slash your dividend and our stock price falls through the floor."
Analysts expect WWE to earn $0.71 per share during the current year and $0.78 per share in 2012, so the company simply cannot afford to pay $0.36 per share every quarter on both its Class A and Class B shares. In fact, despite a considerable cash hoard, WWE wouldn't be able to continue under the original waiver agreement much longer. There are only three possible solutions to this problem:
1. The McMahons could waive an even larger chunk of the Class B dividend - or even waive the Class B dividend altogether - in an attempt to better align shareholder returns with the company's earnings. (Not gonna happen.)
2. The company could double its earnings, providing just enough coverage to maintain a quarterly dividend of $0.36 per share. (Not gonna happen anytime soon, no matter how many rebrandings they announce.)
3. The company could realize that even an extension of the original waiver would not be sustainable much longer, and elect to cut its dividend across all share classes. (By process of elimination, the likeliest scenario.)