Podcasts also usually air live on Twitch on Wednesday afternoons, follow there to get go-live notifications.
Tickers mentioned in this show: ATVI
Tidal River Investments positions the day after the first show airing:
Long: NFLX, ETSY, SPY, TDOC, U, Z, ZG, WK, ATVI
Photography from Tidal River Investments can be purchased at tidalriverinvestments.com
Welcome to Fluctuating Tides, the Podcast, Episode 6. I’m your host, SomeCodingGuy, and let’s get right to it!
In the cloud covering the markets this week, buying opportunities have a habit of presenting themselves - this week I’m going to be covering Activision Blizard, ticker: ATVI, a company that’s been focused on gaming for decades. Activision Blizzard’s stock recently pulled back quite a lot due to some regulatory scrutiny and legal matters, which we’ll address in a bit, but this stalwart of the gaming industry is currently trading at a 52 week low and looks poised to capitalize on future releases.
So for this week’s knowledge segment, and because Activision Blizzard pays an annual dividend, I’d like to cover dividends; specifically what they are for public companies, and a brief bit about their sustainability.
What does a company do when it earns too much money? Management has a number of choices after paying the bills: most commonly for growth companies, they’ll reinvest excess profits into existing and new product lines hoping to spur future growth. Based on the stock price, sometimes the company will buy back shares of its stock, which effectively eliminates those shares and improves the per-share figures like EPS, which generally causes the price to rise, a popular technique in recent years. Assuming the company has no further use of the funds beyond these, the company can also choose reward shareholders for holding the stock by giving the money directly to them, also called a dividend. To pay the dividend, they usually use an outside company known as a transfer agent, who handles the specifics of writing checks based on the number of shares each shareholder has. Shareholders who hold the shares by the date announced when the company announces the dividend, or the shareholders of record as of the given date, will receive these checks. As we went into previously, most shares are held in street name, which is to say that the shares are actually in the name of your brokerage, not in your name directly, so these payments are usually made electronically to your brokerage account, where your brokerage deposits them in your name. There they will show up either as regular cash, or if you chose to do so, the broker will purchase additional shares of the same company using these funds.
Sounds pretty good, right? So why doesn’t every company pay a dividend? Well, like I said, they generally utilize additional funds to keep growing, hoping to lead to a higher stock price.
Most companies use a blend all of these techniques, choosing to pay out some of the money as a dividend, some of the money for future growth, and some of the money for share buybacks. Activision Blizzard happens to do all of these, so it begs the question: how much of the profits are being paid out in the dividend? This is known as the dividend payout ratio, or more specifically, the percentage of earnings paid out relative to net income, or income after the expenses have been take it out.
From the most Recent balance sheet, Activision Blizzard paid out $365m in dividends, against $2.6b in profits, giving them a payout ratio of about 14%. Not a huge amount of the profits, but it should be easy to sustain payments at that level. They’re also authorized to repurchase $4b in stock over the next few years, and they continue investing in growing core and new games. These calculations are included in more detail in the spreadsheet linked in the show notes.
Activision-Blizzard has three major revenue-generating segments - Activision itself, with Most of its earnings coming from the Call of Duty franchise, a regular hit; Blizzard, known for a variety of games ranging from Overwatch to Diablo to the regular subscription generating machine of World of Warcraft; and King, the mobile giant behind the Candy Crush Saga and a number of other casual titles, purchased in 2015. Activision is the single largest segment at almost twice the size of Blizzard at $789m in the most recent quarter, with King coming in the middle at around $635m. Revenue Tends to spike across the holidays in the fourth quarter, with Blizzard being fairly steady based on its subscription Revenue from World of Warcraft, and King staying fairly steady in growth over the last six quarters.
Trends don’t provide too much information other than to see how existing franchises are continuing to perform, so it helps to keep an eye on what titles are coming for the business. The pipeline looks loaded with a new version of Diablo, Overwatch, continued Call of Duty expansions and expansions in Mobile, and the rock steady Candy Crush Revenue as well as additional experiments in mobile gaming coming in future quarters. Management pointed out that despite entertainment growing at 17% annually between 2017 and 2020, there’s been increased consolidation among the top titles, with all 10 of the top US titles having been established prior to 2020. Activision Blizzard itself derives 76% of its net revenue from Call of Duty, Candy Crush, and World of Warcraft alone. They also highlighted the return of one of the original Founders, Allen Adham, working on incubating new video games and IP, but they’re not releasing any details about that for now.
Let’s take a step back from the balance sheet for a minute. Activision Blizzard has been in the news a lot over the past year, regarding accusations addressing workplace practices and improper behavior. They recently disclosed and are cooperating with inquiries from the SEC, the EEOC, the NLRB, and the California Department of Fair Employment and Housing. Management has stated repeatedly in the past several earnings calls that they will not tolerate unequal treatment of any kind, and publicly we’ve seen a number of staffing changes, including the addition of Julie Hodges as the company’s Chief People Officer, coming in from Disney, changes at the top of Blizzard with Jen O’Neal and Mike Ybarra co-leading the studio, and some reshuffling in the legal department.
Specifically in reference to the California DFEH probe, the company has highlighted in their most recent quarterly filing that they are unable to predict the impact of that inquiry on their financial condition, operating results, and liquidity, so they’re certainly some question marks on what’s going on at the company. Unfortunately it’ll take some time to get clarity on the corrective actions and how they’re working, or the degree to which there were workplace issues, and my guess is that a lot of this uncertainty has played into the recent drop in the stock price. As an outsider, it’s hard to judge the significance of these issues, since profits aside, I’d rather not be a shareholder in a company running afoul of a safe workplace, but from the public statements, the company seems committed to addressing these concerns and correcting past complaints.
With the management changes and announcements regarding the workplace environment, I think they’re taking the challenges seriously, and the shadow over this stock weighing it down has already been priced in. Given all of this, Tidal River is going to take a position in Activision Blizzard this week, keeping in mind that if we gain any more insight into negative behavior or these measures failing, we’ll close the position regardless of the state of the balance sheet. It’s a tricky call to make as an outsider, but the proven history from management, the low forward Price to Sales, the stacked future content pipeline, and the nearly record low PE of this stock alongside Management’s commitments, seems to justify the present risk. As always, the basis of the calculations and the argument are spelled out in more detail in the spreadsheet attached in the show notes.
If you like the podcast and want to see more content like this get created feel free to subscribe on your favorite podcast app, or buy a photo from https://tidalriverinvestments.com - money earned on the photos gets deposited in the investment account. As always Tidal River Investments and I are not financial advisors, market analysts, or otherwise in any way offering advice for or against any of the securities discussed - meet with a financial advisor for that information. Stocks and funds may not be good investments for you, depending on your financial situation.
We’re here for learning, not advice, and I wish you the best on your financial journey, and remember, tides fluctuate!