GME Stock: Dividend Investors Bullish on GameStop
November 25, 2016
Dividend Investors Shouldn’t Ignore GME Stock
When dividend investors are looking for investment opportunities, the most important information is the long-term visibility of the business’ cash flow.
If the business is not generating enough cash flow, then the company will likely look into a dividend cut. Owning a company that has just had a dividend cut could be devastating, especially since the stock price could plunge along with the dividend.
Patient dividend investors have two goals in mind: a steady dividend payment and the preservation of capital on the initial investment.
I have found a specialty retailer that continues to reward its shareholders via the dividend and bring in steady cash flows.
I’m talking about GameStop Corp. (NYSE:GME). GameStop is a retailer that sells consumer electronics, primarily video games, with a recent shift towards providing wireless services. Let me explain why GME stock is worth your time.
Diversification
In August of this year, GameStop acquired 507 of AT&T Inc.‘s (NYSE:T) wireless stores, which would add $1.0 billion in revenue. This is not the first time it has pulled such a move; in 2014, GameStop bought approximately 150 stores under the Spring Mobile banner. (Source: “GameStop Acquires 507 AT&T Stores in Diversification Plan,” Bloomberg, August 2, 2016)
The move away from video games and electronics is because the earnings outlook could be bumpy each quarter going forward. GameStop’s products are not controlled by the company itself, with their quality and release dates being in the hands of the publishers and developers. Therefore, when a new game does hit the shelves, it could be hit or miss with consumers. The move into wireless services was done to ensure steadier and growing earnings coming into the business.
Another opportunity that GameStop has is to cross-sell between the GameStop and wireless brands. Over time, as management realizes what is and isn’t working, store closures could occur in order to combine the brands into one store, driving down costs and increasing operating margins. With stronger cash flow and a long term vision for the business, shareholders have been rewarded along the way.
Rewarding Shareholders
Based on the current trading price of GME stock of $26.06, the current shares are yielding 5.68%. The current dividend that is paid to shareholders is $0.37, with the next quarterly payment scheduled for December 13, 2016.
The most impressive aspect of the dividend has been the growth that the payout has seen. Over the past five years, the dividend has doubled.
Looking forward, there is great potential for more dividend hikes because the payout ratio is approximately 40%. The remaining 60% is known as “retained earnings,” which are being used for reinvestments in the form of purchasing the wireless stores.
Assuming the company keeps this same 60-40 ratio going, I wouldn’t be surprised to see more dividend hikes as the wireless business becomes further integrated into GameStop’s ecosystem.
Final Thoughts on GME Stock
Shares of GME stock have a current price-to-earnings (P/E) ratio of 6.87, which is trading at a discount when compared to the 25.36 ratio of the S&P 500. Also, over the past year, shares have traded lower by 37%. Dividend investors considering owning the shares could essentially get paid to wait until the market realizes GME stock should be owned.
Patient dividend investors should consider owning shares of GME stock because even though the dividend is high, its recent movements have created certainty behind the payout. And with a low payout and steady cash flow, expect to see more dividend hikes in the future.
