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Is Nintendo a Great Dividend Stock?

By John Ballard - Updated Mar 4, 2021 at 10:28AM

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The Japanese gaming firm's high dividend yield may look tempting, but don't expect consistency.

Nintendo (NTDOY -1.25%) continued to deliver strong sales results through the holiday quarter. Its profits have been on the rise as the growing installed base of Switch owners buys more games. And that improvement on the bottom line has allowed it to boost its dividend payments over the last year.

Based on management's expected payout of $2.24 per share (1,880 yen), and the current share price, Nintendo's dividend yield was 2.89% at the time of writing, well above the S&P 500's average yield of 1.48%. 

That's an attractive yield, but there are a few things to consider about Nintendo's dividend if you're trying to decide whether to buy this stock primarily for the income.

A blue and red Nintendo Switch console, and its accessories.

Image source: Nintendo.

Bumpy dividend record

Nintendo's policy on dividends differs from those of most other companies that pay them regularly. It typically makes only two dividend payments each fiscal year, and its distributions are set as fixed percentages of its profits. 

The interim dividend is set at 33% of the consolidated operating profit for the six-month period ending in September. The year-end dividend payment is based on the higher of two numbers: 33% of Nintendo's operating profit, or 50% of the net profit attributable to owners of the parent company.

What this means is that Nintendo doesn't pay a consistent amount to its shareholders, let alone payments that steadily rise every year like the Dividend Aristocrats have a history of distributing. Instead, Nintendo's dividend grows or shrinks depending on the company's financial performance each year.

This policy might make the stock a non-starter for some income investors, especially after they peruse the following chart. From fiscal 2011 through fiscal 2016, Nintendo's net income and dividend per share fell sharply and didn't recover until the Switch hit the market in 2017.

  

A bar chart showing Nintendo's dividend and net income history.

Data source: Nintendo's annual reports. Chart by author.

That drop in the dividend after fiscal 2011 reflected a sharp decline in sales at the time, a result of slowing growth of the Wii -- Nintendo's best-selling console, with 101 million units sold. 

Its next console didn't perform as well. The Wii U, launched in 2012, sold only 13 million units. Nintendo's profits cratered. 

Nintendo is in growth mode for now 

Nintendo has been on a roll with its game releases for Switch, and hot titles are the key to attracting new hardware buyers. Over the last year, Animal Crossing: New Horizons has sold over 31 million copies and was a big factor in driving Switch sales during the pandemic. Other releases that also deserve some credit for last year's performance include Mario Kart Live: Home Circuit and Super Mario 3D All-Stars

The Nintendo Switch is four years old now, but remains a strong seller. Total net sales surged 37% year over year for the nine-month period ending in December, with net profits up 92%.

NTDOY Chart

NTDOY data by YCharts

With nearly 80 million units sold, Switch has a sizable installed base that is fueling higher demand for games. This is great news because software titles generate higher margins than hardware, which is why profits grew much faster than sales last year. Nintendo has sold 532 million games since Switch launched in 2017, or more than five games per Switch owner. According to  management's guidance, the company expects to sell more than 200 million games in fiscal 2021. 

Nintendo's strategy of releasing new games at a fairly rapid clip is working. Those fresh titles not only continue to fuel profit growth, but also serve as marketing to attract people to its consoles. It's a plus that consumers who bought a Switch to play the latest Animal Crossing title went on to purchase other games, and the company has more games on the way in the near term.  

Management believes it can grow cumulative sales of Switch above the sales totals of Wii, which bodes well for the company's growth prospects for at least the next few years. That still leaves the question about what comes after the Switch?

Future uncertainty clouds the dividend picture

The failure of Wii U highlights the obvious risk here. Poor design choices in the hardware or a failure to win over third-party game support for the next game console could damage Nintendo's ability to reach higher sales and profits in the next console cycle.

The main advantage Nintendo has going for it is the exclusive gaming properties it owns. Those can't be played on any other platform -- other than mobile devices, where Nintendo is currently operating six titles. Nintendo has complete control over how its in-house franchises are played, which provides the company several ways to keep effectively monetizing its classic gaming brands over the long term. 

Still, I wouldn't call Nintendo a great dividend stock, since its future profits -- and thus, its payouts -- are so dependent on the success of each new hardware launch. I would look at Nintendo's dividend as more of a bonus to enjoy when times are good, rather than something to count on for income every year.

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