Why GameStop Corp. Just Gave Dividend Investors a 9% Raise

By Markets Fool.com

GameStop shares are back above $40 after the video game retailer announced a hike to its dividend this week. The annual payout jumped to $1.44 per share, up 9% from last year. This raise follows big hikes in each of the last two years. All told, the quarterly dividend has more than doubled since management initiated it back in Feb. 2012.

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GME Dividend Chart

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Aggressive stock buybacks
But GameStop has been even more aggressive buying back shares. Since 2010, management has shelled out a total of $1.64 billion for share repurchases, representing over 25% of its current market capitalization.

And the single biggest quarter of buybacks came over the most recent three-month stretch when GameStop returned $144 million to shareholders. That was more than the retailer spent on dividends in the entire previous fiscal year.

GME Average Diluted Shares Outstanding (Annual) Chart

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GME Average Diluted Shares Outstanding (Annual) data by YCharts

One benefit of that skew toward share buybacks is supercharged earnings growth. GameStop has reduced its outstanding share count by 23% since 2010, which has had a dramatic effect on reported earnings.

For example, net income was slightly lower last year than in 2010 ($354 million vs. $377 million). However, factoring in the share repurchases, GameStop managed to report significantly higher earnings on a per share basis: $2.29 in 2010 versus $3.02 last year.

Fourth quarter results on tap
The dividend raise could suggest a strong fourth quarter earnings report later this month. After a surprisingly weak third quarter, the retailer booked solid growth over the holiday shopping season. That was mainly thanks to hit video games like Activision Blizzard'sCall of Duty: Advanced Warfare and Take Two Interactive's Grand Theft Auto V. Management said in January that the momentum should lift this year's results, too. "During the holiday period, consumer demand for video games was strong ... We expect that trend to continue into the first quarter," said CEO Paul Raines.

Source: The Motley Fool

Management forecasts call for comparable store sales to fall by about 2%, but that has more to do with weaker hardware sales, though, as the company is up against tough comparisons with a year-ago period that was dominated by next-generation console launches.

The best part about selling less hardware as a percentage of sales is that profitability is likely to jump. In the fourth quarter of 2013, margins were squeezed as low-margin video game consoles leapt to 32% of sales from 17% the year before. Investors can look for the trend to swing in the other direction in 2015. Wall Street expects fourth quarter profit of $2.16 per share, a year-over-year increase of 14%. GameStop is scheduled to announce its fourth quarter results after the market close on March 26th.

The article Why GameStop Corp. Just Gave Dividend Investors a 9% Raise originally appeared on Fool.com.

Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of 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.