Should WWE Cut Its Dividend Further?

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World Wrestling Entertainment , better known as WWE, is more than just a wrestling promoter -- it's a full-fledged media company. Seventy percent owned by its founding family, the McMahons, WWE appears at first sight to be an unattractive pick: Earnings have been mediocre for the past few years, its valuation seems terribly high when considering those earnings, and professional wrestling just isn't a big topic on Wall Street. But underneath the gargantuan men in spandex shorts rolling all over each other is a very real business, and one that might just justify its current price, if not more. Here's what you need to know about World Wresting Entertainment.

The business
Say what you will about the validity of the sport it promotes, but WWE is a good business with some managerial problems. Its founders and nearly whole-owners, the McMahons, have run the company relatively conservatively. The balance sheet is clean as a whistle, with zero debt on the books. The company was able to bring back Dwayne Johnson, a.k.a. The Rock, whose celebrity has helped pay-per-view numbers fly up.

WWE also pays a 4.6% dividend, which brings us to the problem:

The company's earnings are not enough to pay the dividend.

WWE is paying its shareholders more than it's earning -- an unsustainable practice at best. Is this a move to prop up the price of the stock in the near term, ensuring the value of the McMahons' personal stake? When the company cut its dividend from well over $1 to its current level, investors abandoned in droves. This is one important question, but there are other considerations, including what the company would be like without its dividend payment.

If WWE stopped paying its $0.48-per-share dividend tomorrow, earnings would look much, much better. Take the just ended quarter, for instance. WWE earned $0.07 in net income. With the $0.12 added back in, that's a far improved situation for the company and would appease analysts' concerns immediately. Sure, it would upset the dividend-seeking investors, but the resulting capital appreciation would potentially outweigh the loss of dividend.

Another possibility is the sale of the company. At present, the McMahon family represents 80% of the voting rights, and probably keeps pressure on the stock price, as the company can basically do whatever it wants without the approval of the remaining 20%. If the company were to be sold to a bigger media company, or even taken private by the McMahons, the underlying value would be illuminated, and the dividend fog lifted.

WWE has a thriving businesses, despite its tepid growth. Last quarter, live entertainment sales grew by 13%, ticket prices increased by 39% (helping to make the last Wrestlemania a record event for the company), venue merchandise grew 28%, TV revenue was up 17%, revenue increased 27%, and so on and so forth.

Clearly, the problem here is not with the underlying businesses, which are almost all doing exceptionally well. It's the allegiance to the high dividend payout that's keeping WWE from being a high achiever in stock price.

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