Fans of WWE (NYSE:WWE) have nothing to worry about for five years. The company has locked in television revenue for that period, which should keep it steadily profitable (and able to pay its dividend) over that time frame pretty much no matter what else happens to its business.
That's the good news for investors, but it's not the whole story for the company. WWE has seen its overall popularity drop -- including television ratings, streaming network subscribers, and live attendance. These trends may stabilize, but if they don't, the self-described sports entertainment company may have some serious long-term viability problems.
WWE has seen its biggest shows lose audiences. Image source: WWE.
Can WWE take a punch?
WWE's revenue appears strong, or at least it will be once its new television deals kick in. The company will earn roughly $500 million a year over each of the next five years for its Raw and SmackDown programs in the U.S. That's roughly double what it earned in the past year, and it's money that does not come with any significant new expenses.
Add to that WWE's third night of cable programming with its NXT brand on Comcast's USA at a reported $30 million a year, and the company clearly has strong revenue. That should bode well for investors and WWE's dividend, but there are some long-range headwinds to be concerned about.
"Domestic TV ratings for Raw, which had declined 14% in the second quarter, improved to a year-over-year decline of 6% in the third quarter. Similarly, domestic TV ratings for SmackDown, which declined 11% in the second quarter, improved to a 4% decline in the third quarter. Importantly, ratings from both Raw and SmackDown surpassed the aggregate performance of the top 25 cable networks," said WWE president George Barrios during the company's third-quarter earnings call.
That's less of a decline -- but still a decline in the one area that carries the company's business. Live shows, it should be noted, actually lost money in Q3, and WWE Network subscribers fell. Barrios is confident that SmackDown moving to Fox should help its long-term ratings prospects.
Any investor in WWE should be concerned about its ratings drops and decline in overall popularity. Having locked-in five-year TV deals at significantly higher dollars than the previous deals will cover up a lot of problems and provide revenue stability. The problem is that if popularity continues to decline, Fox and Comcast will not want to renew these deals, and the company could see a major drop in income.
Can WWE sustain its dividend?
Net income came in at $0.06 per share in Q3. That's down from $33.6 million ($0.37 per share) in the same quarter a year ago. That decline in profit means that the company will not cover its $0.12 per share dividend and will have to dip into its cash reserves to pay out shareholders.
That will almost certainly change when the new television deals begin. The increases in revenue delivered by them will essentially be all profit since expenses are not rising significantly.
WWE has a struggling business when it comes to audiences and a thriving one when it comes to revenue. Eventually, those two things have to line up. Either the company will find a way to become more popular (perhaps due to added exposure on Fox), or it will keep losing audience and not be able to make new TV deals that equal its current ones.
Investors can take heart in the fact that the company has a few years to turn around its fortunes. Wrestling has generally been a cyclical business, and it's very possible this current down cycle will abate before WWE has to negotiate its next set of domestic TV deals. If it doesn't, though, its dividend will become hard to afford because its non-TV revenue does not support it.
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November 24, 2019
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