Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, I want to focus your attention on console and PC video game and accessories retailer GameStop (GME 0.10%).
A dying industry?
I know what you're thinking: "Video game margins stink and competition in the industry is too tough for GameStop to succeed." You're partially right, as competition among console makers and the rise of streaming content has dramatically slowed the growth of traditional console sales.
Amazon.com is a force to be reckoned with in the online retail gaming segment. It has regularly made a name for itself by doing what Wal-Mart does to brick-and-mortar stores by undercutting the competition in price, as well as offering users the convenience of ordering from the comfort of their homes rather than trekking to a busy mall.
Sony (SONY 0.37%) is also doing its best to rain on GameStop's parade. The Japanese electronics company recently filed a patent that would block the usage of secondhand games on next-generation Sony gaming consoles. One of GameStop's most profitable practices is repurchasing and reselling used games without giving the developing company a cut of the profits. Sony's new patent would lock out users who attempt to use a secondhand game based on RF tags associated with each game. Microsoft (MSFT -1.84%), just this week, issued a similar decree, noting that used games will not work on its new generation of Xbox consoles.
Sounds like a mess for GameStop, right? I actually think it's quite the opposite and feel that GameStop is making all the right moves now to ensure steady profits and big returns for shareholders in the future.
Heading for a new high score
GameStop recently announced a restructuring that could involve the closure of about 200 of its 6,000-plus stores nationwide as it focuses on cost-reduction, and the move toward PC, digital, and mobile applications.The move makes a lot of sense considering that in its one-time-charge-riddled third-quarter report, management noted a 32% increase in digital receipts and mobile (i.e., tablet-based) gaming sales that remain right on target to hit $150 million to $200 million for the year. GameStop understands how important the shift to PC, digital, and mobile has become and has been actively deploying its cash in this high-growth area.
If you think Sony's patent threat or Microsoft's Xbox announcement this week is a serious concern, then you just don't know the gaming community all that well. Even though I'm far from a gaming enthusiast, I can tell you with almost 100% certainty that gamers will simply turn to different consoles or other streaming sources in order to get their fix. Gaming enthusiasts love a good deal just as much as any consumer, and, with GameStop's used-game margins accounting for 48% of its profits in the most recent quarter, it'll do whatever's necessary to ensure the longevity of the secondhand game market. These moves by Sony and Microsoft only serve to hurt future sales of their consoles.
Also, don't underestimate the power of a strong gaming title. I may no longer be "hip" like I once was, but I know for a fact that Take-Two Interactive's Grand Theft Auto V, due out in September, just might prop up the entire industry on its shoulders for a few months. A press announcement from Take-Two in November noted that 125 million copies of the series have been sold since it was first introduced, and, if sales of part five of this series are anything like part four, expect around 25 million copies to sell.
Another key component to GameStop's success is its partnerships. Early last year GameStop partnered up with Activision Blizzard in order to expand its library of digital game offerings. Last year, GameStop was able to introduce Activision's Diablo III on digital formats and will be looking to add to its assortment in 2013.
The real power-up
But what really makes GameStop stand out as a phenomenal company is its incredible cash flow and rapidly growing, yet still young, dividend.
Even as sales have plateaued in recent years with the rise of streaming content, margins have expanded and free cash flow generation remains incredibly strong. This has allowed GameStop to return value to shareholders by repurchasing its shares, initiating a dividend in early 2012, and funding all restructuring and digital/mobile development costs from operating profits. With $366.4 million in cash on hand and no debt, GameStop is a well-funded cash cow:
Source: Morningstar. TTM = trailing 12 months.
Given the company's enormous FCF, it instituted a dividend of $0.15 in early 2012 only to raise that dividend to $0.25 two quarters later. At a current payout of $1 annually, GameStop shareholders are netting a 3.7% yield for a company paying out about 32% of Wall Street's projected 2013 EPS.
Foolish roundup
I'll freely admit that on the surface GameStop doesn't look like the type of company you could blindly trust for a long-term investment. However, its move into digital and mobile, its tight grip on the secondhand game market, its growing number of partnerships, and its unparalleled cash flow make it one of the most undervalued companies I've featured in this weekly column. At less than eight times forward earnings and yielding 3.7%, I feel it's a dividend-paying company you can trust over the long term.
