GameStop looks like a bargain. A trailing twelve month PE ratio of 6.39. A current dividend yield of 6.33% with a payout ratio of 38%.
As a dividend growth investor, we want to invest in companies with long runways for growth. This allows us to collect a rising income stream for many years.
We don’t see a long runway of growth for GameStop. Even though GameStop’s dividend looks enticing, we think dividend growth investors should avoid it.
The bulk of GameStop’s sales comes from new games and the reselling of pre-owned games.
Selling games especially pre-owned games used to be a tremendous business. But that has changed with the ability to download games direct to your gaming console now.
Never underestimate the human tendency to take the easy path. It is part evolutionary. It saves energy.
Is it easier to get dressed, drive down to the local game stop, find the game, buy the game, and drive back? Or is it easier to sit down, turn on your console, find the game, buy it with your pre-loaded card information, and then start playing?
And the ease of purchasing the game from your home will also stop people from driving to the store to save money on a used game.
It is because people naturally take the easier path that we don’t see a long runway for growth for GameStop and its dividend. Yes, GameStop is trying to diversify its business away from selling games but it is still the largest part of its business. As long as selling physical games remains under pressure we don’t see how GameStop can provide the dividend growth we are looking for.