Nobody was buying shares of Blockbuster (NYSE: BBI) for its miserly $0.02-per-share quarterly dividend. Even as the stock cratered to as low as $6.28 yesterday, nobody would consider making a capital appreciation blunder in order to reap a paltry 1.2% yield. That's why Blockbuster is doing the right thing this morning: It's axing its quarterly dividend.
There is too much at stake for Blockbuster to be worried about making sure that its shareholders get their literal two cents' worth. This company has been mired in deficits all year. In its June quarter, it posted negative free cash flow of $119 million. If you think you're seeing red, just imagine Blockbuster's angry creditors.
Blockbuster, in its present state, had no business paying out a quarterly dividend. More to the point, Viacom (NYSE: VIA) had no business demanding a special $5-per-share distribution from Blockbuster last summer in order to win its emancipation. When Viacom initially acquired Blockbuster, it was seen as a cash cow. Now the heifer has been filleted and discarded.
Until recently, I was mostly convinced that Blockbuster's days were numbered. It was trying to compete against Netflix (Nasdaq: NFLX) with a ludicrous pricing strategy that devalued its own bricks-and-mortar business. It was even trying to outbid Movie Gallery (Nasdaq: MOVI) in the hope of acquiring the additional dead weight of the Hollywood Video chain.
However, ever since corporate raider Carl Icahn came aboard, a sense of financial sensibility has begun to emerge at Blockbuster. It recently raised prices for its online subscriptions. It negotiated with its creditors. And this morning, the company announced that it would not be declaring a third-quarter dividend.
If rhyme and reason hold firm, it may only be a matter of time before Blockbuster either retreats from the online rental market entirely or partners with Amazon.com (Nasdaq: AMZN) to tackle the business properly.
Blockbuster was trying to fight too many battles, and its dividend was just one more promise that its balance sheet couldn't keep. This isn't an easy industry. Wal-Mart (NYSE: WMT) has failed in both the online and offline video-rental markets. That's why Blockbuster is right to focus on its bread-and-butter business, preserving as much cash as possible to keep its debt load from becoming an unforgivable corporate avalanche.
Will readers of Income Investor be pained by the payout going poof? No way. This just isn't the kind of company that Mathew Emmert recommends to his newsletter subscribers. He picks out financially sturdy companies with the ability to maintain -- if not increase -- their dividend distributions. Blockbuster was an imposter with its quarterly checks. Good riddance to the company's insanity in providing the payouts in the first place. This doesn't make Blockbuster any less desperate, but it certainly will make it more lucid; right now, clarity is critical to its survival.
Netflix and Amazon.com have been recommended by our Motley Fool Stock Advisor newsletter service. Learn more with a free 30-day trial subscription. If dividends float your boat, consider a risk-free offer to check out Mathew'sIncome Investornewsletter service.
Longtime Fool contributor Rick Munarriz lives in South Florida, the original nesting ground for Blockbuster. He also owns shares in Netflix.
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