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Dividends and Buybacks: The GameStop Conundrum

Stocks in this article: GME GCI

NEW YORK ( TheStreet) -- One of the most compelling presentations I saw at this past May's Value Investing Congress was on the benefits of dividend growth and the power of combining dividends with share buybacks, the brainchild of Advisory Research's Bruce Zessar and Matthew Swaim.

Now, I've long been a proponent of the notion that increasing dividends may be a better measure of a company's success, health and future prospects than earnings alone. I also believe that increasing dividends demonstrates management's confidence in the business.

But Zessar and Swaim took that theory to new levels, citing research that contradicts the long-held theory that paying dividends can reduce a company's opportunities for growth.

Zessar and Swaim presented evidence that higher dividend payouts can actually lead to higher future earnings growth, although they are cautious on the higher-yielding names due to the possibility of dividend cuts.

Given the extraordinary amounts of cash on company balance sheets these days, there are a whole host of quality names that are both increasing their dividends and buying back stock (but I'll save those for another day). There are also some names that have shown some distress but are also pursuing the growing dividend/buyback path. I'm very curious about these situations.

On Thursday, GameStop (GME), which is world's the largest videogame retailer, announced a 67% increase in its' quarterly dividend, from 15 cents to 25 cents. That would put the indicated dividend yield at a lofty 5.6%.

On the buyback side if the equation, the company repurchased 7.6 million shares during the second quarter alone (at an average price of $17.96), and has reduced shares outstanding by nearly 9% in the past year.

There's also an additional $300 million remaining on the company's most recent buyback authorization. Thursday, the company announced that it plans to return $2 billion to shareholders over the next four years via buybacks and dividends.

What's amazing about these developments is that GameStop is in an industry that is changing rapidly, moving away from purchases made at brick and mortar stores, of which GameStop has a great deal -- 6,628 to be exact -- toward digital. In fact, same-store sales fell 9.3% for the quarter.

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