Vince McMahon built the sports entertainment empire World Wrestling Entertainment (NYSE:WWE). It's still the largest professional wrestling company in the world, yet WWE shares are down more than 50% since the October 1999 IPO. Unfortunately, this stock has been pinned down by stagnant growth and a rising threat from a new competitor. Plus, WWE's bloated dividend yield, the best reason to buy the stock, is now in danger of tapping out. (For more wrestling picks, see The Professional Sports Portfolio.)

TUTORIAL: How To Detect Market Strength

WWE's Unsustainable Dividends
Boasting a ravishing 12% yield, WWE's Class A dividend may be cut as early as the Q1 report on May 5. WWE earned 71 cents per share for all of 2010, while paying out a 36 cent dividend per quarter. Unless profit grows or the controlling McMahon family waives their Class B shares, the dividend must be cut and the shares will tumble further. (Learn more about dividend risk in Your Dividend Payout: Can You Count On It?)

Several operational factors are making WWE an unattractive accidental high-yielder. In fourth quarter of 2011, operating income declined by 22% and earnings fell as live event attendance dropped 15% in North America. Like WWE, Live Nation Entertainment (NYSE:LYV) is another company that depends on gate revenues, which experienced a difficult 2010. That might mean it was simply a down year for most companies that host live events. Unfortunately, a business that is closely related to WWE battled its way to a great year - and that doesn't speak well for WWE. (For more on financial information, check out 12 Things You Need To Know About Financial Statements.)

UFC Slams Wrestling
WWE dominates a very niche segment of the entertainment market, but professional wrestling is grappling with privately held Ultimate Fighting Championship's growing shadow. Some argue that the two companies don't compete with each other; that one is sports (UFC) and the other is sports entertainment (WWE). This is not true. Fans are clearly crossing over from the WWE's ring to the UFC's octagon. Pay-per-view purchases of WWE shows slipped 15% and home video sales plummeted 44% last quarter. Meanwhile, the UFC, which is slowly swallowing boxing's talent and business as well, is doing record pay-per-view buys and live gate attendance. It's no coincidence that as the popularity of mixed martial arts soars, demand for WWE events is waning.

The WWE has long touted global markets as potential growth drivers. However, the UFC is the promotion that is actually packing stadiums in England, Australia, Ireland and Germany. Events in Brazil, Korea, China, India and Japan are in the works, and the UFC is set to put 55,000 fans into the Rogers Centre in Toronto this weekend.

Where WWE is dependent on continuously creating fresh, new stars, UFC's brand is the draw. No one superstar drives pay per view buys and attendance. A collection of talent, including pound-for-pound kingpin Anderson Silva, emerging superstar Jon Jones, and Canadian cover boy Georges St. Pierre, comprise a growing roster of talent that is becoming more recognizable around the world than wrestling stars. Even former WWE Champion Brock Lesnar jumped ship and is now a current UFC heavyweight contender (and former title holder).

One arena where both companies are seeing softness is video games. Sales of the Raw vs. Smackdown franchise, developed by THQ (Nasdaq:THQI), have slowed considerably. So has the "UFC Undisputed" video game series. Last quarter, WWE video game sales dropped 35%. Annual wrestling and fighting video game releases might be suffering from saturation, and THQ has mentioned the possibility of extending the life cycle of games for both UFC and WWE franchises. There's one major difference between the two situations. The UFC has only had a video game for a few years, so it will take some time to get it right. Professional wrestling video games have been around for much longer; however, the soft WWE game sales are endemic of a broader trend. (To read about more video game stocks, see Power Up Your Portfolio With Video Game Stocks and The Best-Selling Video Games Of All Time.)

Here We Go Again

In addition to competitive pressures from the UFC, investors need to be concerned about WWE's intentions to diversify away from the ring. On April 7, World Wrestling Entertainment officially rebranded itself as "WWE." The new company will be a diversified entertainment company, featuring a TV network with scripted and reality shows, and animated programs, along with wrestling events. The concern for investors is that WWE has a dubious history of businesses outside core wrestling operations. The failed XFL football league and wrestling-themed restaurant in New York City do not portend well for WWE's latest attempt at reincarnation.

The Bottom Line
The impact of WWE's rebranding won't be fully realized until the details of a potential TV deal are released. In the meantime, investors should prepare themselves right away for a shock when the dividend gets slammed. The long-term issue is that WWE shares haven't fully factored in how much market share UFC is taking. Professional wrestling has been pronounced dead a dozen times throughout its history and managed to survive. The WWE isn't going away any time soon. The question is: has the WWE finally met its match? (For more on company analysis, read Top-Down Analysis: Finding The Right Stocks And Sectors.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center