It's "game over" for one of the retail world's juiciest payouts. GameStop (GME +0.77%) announced after Tuesday's close that it's eliminating its quarterly dividend. It was a stock-rattling move, shaking any remaining income investors out of the fading retailer of video games and gear. The stock responded by losing nearly a third of its value in Tuesday night's after-hours trading, bringing the shares down to levels last seen in early 2003.
GameStop's yield was up to a whopping 19.4% by Tuesday's close, but its board feels that it's better off keeping those chunky disbursements to itself. With sales and profitability going the wrong way, the fading chain is worried more about preserving its own business than its once-bountiful payout.
Image source: GameStop.
Taking things to a whole new level
Some distributions are too good to be true, but that wasn't the case with GameStop. Its retail empire of more than 5,700 small-box stores has always earned more than its dividend. You would have to go all the way back to fiscal 2006 to find the last time that GameStop earned less than the $1.52 a share it shelled out in quarterly disbursements last year, and that point is moot since the retailer wasn't declaring dividends until 2012.
The fear with GameStop has always been the sustainability of its elevated distributions. With consoles and pre-owned sales plummeting in its latest quarter, the bottom line took a big hit, making this potentially the company's first year with a payout ratio north of 100%. Things weren't going to get any better from here, as gamers shift to digital delivery and other tech diversions over traditional disc-based software games.
As the stock began to slide and the yield began to inflate, GameStop attracted income investors, naturally. It also attracted buyout speculation, and it explored strategic alternatives until it announced earlier this year that it was no longer up for sale.
There is no reason to be optimistic about where GameStop will be in five years. It's toast. However, it will take plenty of detours on the way to extinction, and that will provide potential entry points including today once the dust settles. As long as GameStop is generating a ton of free cash flow, it's going to be worth a lot more than zero. Eliminating its dividend is going to make a lot of investors unhappy, but the roughly $157 million that it was mailing out annually can now be put to better use paying down its debt and repurchasing its shares. Perhaps more importantly, the heftier coffers can be used to bankroll the initiatives that will give GameStop new life even if the video gaming industry migrates away from physical retail.
It shouldn't surprise anyone to see the stock trading higher than Wednesday's low by the end of this year, especially as we move to the seasonally potent part of GameStop's operating calendar. The end of a fat yield stings, but it was inevitable. GameStop has time and now the means to reinvent itself, and the prospects for a near-term bounce are stronger than the far more grim long-term prospects here.
