Will This 5% Yielder Get An Upgrade In 2016?
The fourth quarter is “make or break” time for most retailers. In fact, the term Black Friday comes from the idea that on that day, retailers become profitable for the year. In other words, from January through November, many retailers are not profitable. But that big push between Thanksgiving and Christmas makes their entire year.
That’s not exactly the case for video game retailer GameStop (NYSE: GME). But the fourth quarter is extremely important.
Last year, the company made $244 million during its fiscal fourth quarter. It earned $150 million in the prior three quarters combined.
So shareholders are eagerly awaiting any indication of how GameStop’s business went this past holiday season.
In the meantime, they’re content to sit back and collect a strong 5.1% dividend yield. But can they rely on that yield going forward?
GameStop has consistently raised its dividend every year since it began paying one in 2012. That’s a positive. However, the track record isn’t long enough to give us confidence that the dividend is sacrosanct in the eyes of management.
The company has no problem paying the current dividend, which is $1.44 per share. Over the past four quarters, it has paid $116 million in dividends while generating $450 million in free cash flow. That’s a payout ratio of just 26%. That means that for every dollar in free cash flow that GameStop generates, it pays out $0.26 in dividends.
That leaves plenty of room for the company to raise the dividend even if the following year isn’t particularly strong.
However, GameStop’s dividend safety rating has been hit by a drastic fall in cash flow in fiscal 2015 (which ended January 31, 2015), when it dropped by more than half, from $673 million to $321 million. In fiscal 2016, ending this January 31, the estimate is for a rebound to $424 million. Other than the level seen in 2015, that’s the lowest since 2011.
And analysts are calling for free cash flow growth to be flat in the next fiscal year, which is concerning.
For a stock to receive a high rating from the Safety Net, the line in the above chart needs to be moving up and to the right… not running flat.
Though the company will have generated more than enough cash flow to pay the dividend if it hits analysts’ estimates next year, the lack of cash flow growth is concerning.
And without a long track record that demonstrates management’s commitment to the dividend, I have to question whether the dividend will be safe over the long term if cash flow doesn’t improve.
I suspect the dividend is safe for at least 12 months, but I want to see cash flow moving higher to give me more confidence.
If GameStop surprises Wall Street this year with higher cash flow than it had this past year, GameStop will certainly be upgraded. And once it has paid a dividend for five years without a cut, it will also be in line for an upgrade.
So although the current rating is not high, there is a strong likelihood that the stock will be upgraded, perhaps significantly, a year from now.
Dividend Safety Rating: D
If you have a stock whose dividend safety you’d like me to analyze, please leave the ticker symbol in the comments section below.
Good investing,
Marc
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