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Dividends and Buybacks: The GameStop Conundrum

While digital revenue rose nearly 27% to $134 million, that represented just 8.6% of total revenue. The company expects FY 2012 comparable same-store sales to be in the -2% to -10% range, it pegs full-year earnings in the $3.10 to $3.30 range, implying a price-earnings ratio under 6.

Clearly, this is not the type of company that Zessar and Swaim had in mind in their presentation. But my interest is piqued at this point. GameStop has periodically appeared on some of the value screens that I utilize, but these recent developments are very curious.

Companies don't typically raise their dividends if they know that such payouts are unsustainable. GameStop's dividend increase was extremely bold and the recent buyback spree would suggest management believes shares are undervalued.

The combination of the two either demonstrates an extreme level of confidence on management's part or a heavy dose of wishful thinking.

From a balance sheet perspective, there are pluses and minuses. On the plus side, GameStop has $138.7 million in cash and no debt, and trades about 0.8 times book value per share. On the negative side, much of book value, nearly $2 billion, is comprised of goodwill and intangibles, and the company is currently performing an impairment test on $920 million worth of intangibles.

Clearly, the markets are expecting little from GameStop, given the forward PE of 5 based on next year's earnings. Management, however, by its rather bold actions, is saying the Street has it all wrong.

I've seen similar situations in the past couple of years. Gannett (GCI) is a great example.

All but left for dead, and arguably in worse shape than GameStop before rebounding, the company is also in an industry seen to be in decline. Gannett, however, has seen fit to aggressively raise its dividend in the past year, and is also buying back stock. The company continues to generate loads of free cash flow but is still viewed with disdain by many.

I'm keeping an eye on GameStop at this point, but I am not ready to pull the trigger.

At the time of publication the author had a position in GCI.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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