This article is part of the Real-Money Stock Picks portfolio series.
Having just purchased shares of one "dead" company, Barnes & Noble for the Messed-Up Expectations portfolio, I'll now proceed to purchase shares of the other "dead" company in this portfolio, GameStop (NYSE:GME).
"He's dead, Jim." -- Part Deux
GameStop is actually one of my favorite companies and I've purchased it several times since late 2010 (a double for that one -- sweet!). The common wisdom that seems to have plagued this company all this time is that its business is doomed. First, other retailers would shoehorn into its used-games business competing that to nothing and, second, digital downloads would remove the need for physical copies of games anyway. Thus, bye-bye GameStop.
Well, GameStop didn't follow that playbook. Yes, its business has been threatened and challenged by a much slower console release cycle and a big move toward digital downloads. The Xbox One and PS4 were released several years after the previous versions, versus previous cycles when consoles were released every couple of years. However, GameStop has innovated its way to survival and even some success.
First, it's been taking real advantage of its customer loyalty plan, PowerUp Rewards, making that a stickier product by offering deals to loyal customers. It even recently launched a PowerUp Rewards credit card. Second, it developed a new technology brands division last year, expanding upon its expertise in buying and selling used games and hardware (including iPhones, which it had been doing for several years). This division now accounts for about 10% of the company's operating profit, up from nothing the year before.
Even better, the company has been paying back shareholders. This past year, it's retired over 5% of its shares outstanding through the fiscal third quarter. Since I first purchased shares in the company, it's reduced its share count by 27.3%. Note, it's not buying back its shares and keeping them in treasury ready to be reissued; it's permanently retiring those shares. Plus, it just raised its dividend by 9%, yielding a respectable 3.5% at current prices. This is the fourth dividend hike since the company started paying one in early 2012.
I like the capital allocation and I like the moves the company is making to stay relevant to its customers, even expanding its reach. I'll be adding to the MUE portfolio's position.
Come discuss this decision on the portfolio's dedicated discussion board.
Jim Mueller has the following options: short April 2015 $31 puts on GameStop and short April 2015 $22 puts on Barnes & Noble. The Motley Fool owns shares of Barnes & Noble and GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.