World Wrestling Entertainment (WWE) is not one of the most obscure stocks on the market. CEO Vince McMahon's antics are well known, both in the boardroom and as an entertainer himself! For those unfamiliar with his antics (or those who enjoy re-living WWE moments over and over), a video example of McMahon in action is portrayed below:
WWE pays a dividend yield of almost 9%. However, the following chart demonstrates why you can't choose a stock on dividend yield alone:
Clearly, WWE has been paying out more than it has been earning! Over the last three fiscal years ("2006 T" representing an 8-month transition year to a new fiscal year-end), WWE has paid out 57 cents more per share than it has earned!
How does it do it? Balance Sheet strength! The company has virtually no debt, and more than $2.50 of cash (including short-term investments) per share. That means it could continue to pay out cash over and above its net income by 25 cents per share the next 10 years!
Does that make it a buy? Not quite. At a share price of $17, even if they immediately paid out that entire $2.50 to shareholders, you would still be paying $14.50 for a company that earned 72 cents / share last year, representing a P/E of 20.
When a dividend yield looks appealing, make sure it's not too good to be true!