Wednesday, December 20, 2017

GameStop

I was so tempted to add Gamestop, symbol, GME as my last 2017 Dividend Machine.  I have just $3,400 to invest to finish up the 2017 Portfolio.   But Gamestop while interesting has two strikes again being a Dividend Machine:  problematic revenue growth and anemic dividend growth.

  • Revenue Growth should follow changes in strategic plan
  • Dividend Growth is anemic disqualifying GME as a Dividend Machine
  • Fundamentals are solid


REVENUE GROWTH is a problem


One problem with GME is the entire business model.  They have been a bricks and mortar retailer in a hot commodity, video games.  Competition from streaming and other technology are real threats.  They are making changes to their game plan these changes are the catalyst that I think makes it at least a safe short term dividend play.


GameStop expects to enhance collectibles business to approximately $650-$700 million during fiscal 2017 and anticipates becoming a $1 billion business by the end of fiscal 2019. Earlier, management had stated that it remains optimistic about non-physical gaming businesses and expects this category to reach approximately 50% of operating earnings by the end of fiscal 2019.

posted by Zacks Nov 2017


The changes noted above suggest to me that GME is making the right changes.

DIVIDEND GROWTH is anemic


GME's dividend yield is quite good.  Currently GME pays a quarterly dividend of $.38 per share.  This is an annual yield of 8.3% at the current price of $18.25.   However, their dividend history is weak.  



Any dividend increase is appreciated and once revenue growth returns, perhaps dividend growth will improve as well.

Technically GME qualifies as a Dividend Machine using a 3 year dividend history.  In 2014 their quarterly dividend was $.33 and today it is $.38.  That is an annual growth rate of just over 5%.  But most recent increases have been just a penny which is only a 2.7% increase.  My goal is 4% or more dividend growth.

STOCK VALUE is good


GME's stock price has been pummeled because analysts think they are mired in a dying industry.  But as I suggested earlier, they are making changes and it is beginning to show up.

Balance sheet is good with a D/E (debt to equity) ratio of .3616.  With a P/E ratio just above 5, I am willing to take a little risk.  Moreover, EPS, even during these difficult times is much higher than dividends paid out.

COVERED CALLS are good


As an income investor, I love yield but I also love calls.  It is hard to predict when good calls are out there.  I like a minimum of 1% yield for the call premium and no less than an 8% capital gain should my shares be called away.  I do find it a bit unusual that a stock with such a dividend yield also has some calls available.

I have held GME a long time.   The yield keeps me in it.  I try to ignore the price collapse.  I am adding and selling two calls.   One is a February call and the other is an April call. 

February GME Call





I like the 12.33% return in just 58 days.

April GME Call


My readers know that I rarely sell a call with expiration that is more than 90 days out.  I am making an exception to  my rule because GME does not have March calls and I need an expiration date after March 10 (the expected next ex-dividend date) to capture the dividend. 





I will split my lots in two.  Some I will sell the quick call and hope it gets taken.  On the other lot, I will sell the April call, pocket both the call premium and the dividend.   In addition, I hope to keep this lot.  It will help me lower my basis on my entire stake in GME.   Moreover, the capital I am investing has the potential to pay me nicely.

Good Income Investing

M* MoneyMadam

Disclosure: long GME with calls