GameStop’s Dividend Evidences a Strong Capital Position

Before market open on Wednesday, GameStop (NYSE:GME) announced that its Board of Directors has approved the initiation of a quarterly dividend to shareholders of $0.15 per share. The first quarterly dividend payment, which we estimate will total ≈ $21 million, will be paid on March 12, 2012 to shareholders of record as of February 21, 2012. Future dividends will be subject to the Board’s approval.

Strong capital position was a key driver of dividend decision. In November 2011, the Board authorized a $500 million stock and debt buyback program. In December 2011, the company redeemed its remaining $125 million of Senior Notes outstanding, and is now debt-free. After redeeming these notes, and repurchasing ≈ $45 million of shares over the holiday period (9-weeks ending December 31, 2011), we estimate that the company will end the year with over $680 million of cash, meaning it can easily afford the first dividend payment in the April 2012 quarter.

GameStop likely gained market share over the holiday period. GameStop’s new software sales were up 9.9%, driven by HD console releases, including Activision Blizzard’s Call of Duty: Modern Warfare 3, Bethesda Softworks’ Elder Scrolls V: Skyrim, and Ubisoft’s Assassin’s Creed: Revelations, above U.S. retail console and PC software dollar growth according to NPD of down 4% over November and December. GameStop’s new hardware sales were down 19.6% due to no new releases (and Kinect last year), also above the U.S. retail dollar growth figure according to NPD of down 21% over November and December.

We continue to believe that GameStop is poised for a strong 2012 after a difficult year for the video game industry in 2011. Despite our expectation for negative software and hardware results for January 2012 NPD U.S. retail results (to be released tomorrow after the close), we think that longer-term GameStop is well positioned for a strong 2012 due to highprofile software releases, hardware releases (including Sony’s PlayStation Vita later this month, and Nintendo’s Wii U later in the year), digital growth (up 60% for GameStop over the holidays, led by Call of Duty ELITE), and a likely bottoming out of industry sales in 2011.

Maintaining our OUTPERFORM rating and our 12-month price target of $33, which reflects a multiple of 10x our FY:12 EPS estimate of $3.30. Our price target reflects GameStop’s strong revenue and earnings growth potential from continued market share gains, digital growth, and its repurchase program.

Michael Pachter is an analyst at Wedbush Morgan.