GameStop's Dividend Increase Shows Its Strength

There's no strict tie between the two, but last year, GameStop (NYSE: GME  ) increased its annual dividend by 10% and it increased earnings per share by 10% as well. Yesterday, it announced that it was raising its dividend by 20% this time around. The company is coming off a much stronger year, with comparable-store sales rising over the third quarter and the holidays. Is this the return of GameStop as a strong retailer, or is the business just burning cash while it has the chance?

Tighten the belts when times are good
GameStop has been suffering for a while now. It's no secret that the last gasps of the Xbox 360 and PlayStation 3 hit GameStop hard. Everyone stopped buying new consoles and games, holding off until the newer consoles launched. On top of that, digital sales have picked up across all platforms, hurting the business's in-store sales.

GameStop's cash situation has been bolstered over the past year as well. That's given management the tools it needs to start drawing investors back in through stock buybacks and dividend increases. GameStop's business, even as sales have fallen, has been good at generating positive -- if not incredible -- free cash flow.

The whole buyback-dividend plan is part of a 2010 capital allocation strategy that has led to billions in share repurchases and dividend payouts. For investors, it's also helped shore up the share price, bringing in some of those who may be oscillating between buying and passing.

Dividends do not a business make
All the capital redistribution in the world doesn't turn GameStop into a great business. Microsoft and Sony have helped keep the brand afloat, simply by launching new platforms and popular titles. In particular, Sony's announcement that the PlayStation 4 has sold more than 6 million units bodes well for GameStop. 

GameStop's digital business is still in its infancy, and it's not at all clear that it's going to grow up quickly enough. GameStop's bread and butter has always been the draw of used games, and that market is living on borrowed time.

All that said, GameStop has been managing its money well for the past year. A lesser company could have fallen even further and the fact that GameStop's management was able to navigate the choppy waves in the months before the new consoles launched is good news. The company isn't a straight dividend play -- it only pays a 3.4% yield at today's price -- but it does sweeten the pot. GameStop continues to look like a business with lots of the right pieces for success that may fail anyway, if the video game market shifts under its feet.

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