GameStop in 2018 is a prime example of an investment with asymmetric risk and reward. The company offers a greater than 10% dividend yield with a payout ratio less than 50%. As long as the dividend can be paid we’ll make a good return. (NYSE: GME)
The show notes for this episode, including my outline for today’s podcast, are available below:
Overview of GameStop’s Business Model:
- GameStop is a niche retailer primarily focused on the sale of used video games.
- GameStop operates secondary businesses in Collectibles and Technology Brands. Collectibles are a particularly compelling growth opportunity for the company.
- Gaming is a very cyclical business. The launch of new gaming consoles drives the cyclical nature of the industry. The primary hardware companies involved are Microsoft, Sony, and Nintendo. They own the Xbox, PlayStation, and Switch platforms respectively.
The Nintendo Switch is the most recent console launch which has driven increased profitability at GameStop.
Areas of concern:
- GameStop has declining profits recently.
- The advent of downloadable games and the digital distribution channel are an ongoing headwind for GameStop.
- The Amazon effect is a particularly bleak headwind that has to be addressed.
Why I’m interested in GameStop as an investment in 2018:
- GameStop offers an 11% dividend yield when the stock is purchased for $13.81 or less. Your purchase price is critical to determining your ultimate return.
- I use a 10% hurdle rate on my investments. The current dividend yield exceeds my opportunity cost.
- GameStops forward twelve-month dividend is expected to be $1.52/year.
- GameStop most recent price was $13.50 at the time of podcast recording.
Downside protection:
- The dividend provides our downside protection. Our asymmetric risk and reward are driven primarily by this situation.
- We can earn our entire return hurdle rate simply from the dividend.
- As long as the dividend can be paid, and GameStop doesn’t go bankrupt, we’ll make a good return.
Upside:
- The business is very cyclical and there is a chance that we are at the bottom of a cycle. The release of new game systems by Sony and Microsoft could jumpstart the stock price. This is an alternative thesis to the forever declining business case by the bears.
- I provide a brief discussion of GameStop’s stock history.
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