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In case you haven’t heard, there’s a mobile phenomenon going on. Pokémon Go has taken over as the app/game du jour. The creation of video entertainment company Nintendo Co., Ltd.’s (NTDOY) hit 20-year-plus Pokémon franchise, the game has users searching through cities, parks and other public places for mythical creatures to collect and, ultimately, battle with other users. It forces people to go outside and interact with civilization while playing a game.
It has also “forced” NTDOY shares to more than triple in roughly two weeks. That’s the biggest set of weekly gains for the company in more than three decades.
With the instant success of Pokémon Go – and other games like World of Warcraft or King Digital’s (KING) Candy Crush – some investors have wondered if the video game developers are worthy of their dividend dollars. The answer is not so easy.
From its humble and low-key beginnings in mall arcades, the video game industry has evolved into a juggernaut of epic proportions. Pokémon Go is just the latest example of this. Today, games across a variety of platforms are played by over a billion people worldwide. Global revenues for the sector are quickly approaching nearly $100 billion.
With revenue estimates for mobile gaming alone set to hit $70 billion by 2020, there’s no stopping the juggernaut. Under that scenario and torrid growth, it’s natural for investors to want a piece of the pie. And they should, just not when it comes to dividend seeking.
The problem is that consumers are fickle – and video game consumers even more so. Today’s hottest game could be tomorrow’s dud. And it happens more often than not, especially in the world of mobile gaming. For example, a few years ago Zynga Inc. (ZNGA) could do no wrong with a string of hits. Today, hardly anyone plays Farmville or Words with Friends.
And therein lies the problem. Because, for the most part, the business of video games comes with a huge level of uncertainty, dividends aren’t a high priority. It’s all about growth. With mobile gaming becoming the number one way we play, the uncertainty is even higher. Apps are easily deleteable and changeable. Consumers can quickly change preferences at a moment’s notice. Those looking for a steady dividend payment need to look elsewhere.
Take a look at these video game names below as examples.
Microsoft (MSFT ): While Mr. Softy should see 7.87% growth in its earnings next year over 2016’s $2.67 per share, the vast bulk of that isn’t from gaming. It comes from cloud computing, software and other businesses. Historically, hardware hasn’t been Microsoft’s thing. The firm’s Xbox system is an example of that. Sure it’s been around for a while but, until recently, it wasn’t a big money-maker for MSFT. In fact, it lost money. Even still, MSFT does yield 2.81% and has a low payout ratio of 53%. So it should be able to absorb any problems with its Xbox line. Just don’t count on it to boost profits much.
Nvidia Corporation (NVDA ): Today’s video games look almost lifelike, especially when compared to the 8-bit games of yore. That takes a lot of graphics computing power. And odds are that chipmaker Nvidia provided the chipset. However, despite its dominance, NVDA is expected to report lower earnings next year – roughly 4.49% lower – because manufacturers are selling less game units. And while its payout ratio is a low 29%, any loss of earnings is exactly bullish for future payout growth on its small 1% dividend.
Disney (DIS): There’s plenty to love about the “House of Mouse” and its huge cast of characters, theme parks, television, movie studios and other media-related properties. What isn’t so lovely is its video game operations. In fact, those operations were so poor with sales nowhere near what DIS expected that it shuttered the unit last quarter. Disney’s strong 5% earnings growth in 2017 will continue to drive its dividend. But video games aren’t the reason.
Activision Blizzard (ATVI ): Video game developer Activision is one of the few stocks that actually pays a steady dividend in the field. However, it’s nothing to write home about. Its yield is a measly 0.65% and it features a low payout ratio of just 15%. The reason is that its cash flows tend to be very lumpy. Hit games happen and ATVI has a huge surge in earnings, as evident by its estimated 11% jump next year. But with every flop, or misstep with its World of Warcraft game, and earnings falter. It’s a prime example of why game companies are dividend payers. Meanwhile, chief rivals Electronic Arts Inc (EA ) and Take-Two Interactive Software (TTWO) don’t even pay dividends; instead, choosing to retain all their cash for an eventual rainy day.
The success of Pokémon Go shows that gaming is full of growth opportunities. But that growth comes with a hefty side of volatility. Major misses and consumer fallout can happen just as easily as big hits. With that in mind, dividends aren’t a chief concern for video game companies. Investors looking for steady income might be better suited elsewhere.