This Company's Secret 18%+ Dividend
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's a shame when investors don't really listen to what a company is saying. It's also a shame when investors use too short of a time horizon to try and predict the future of a company. Both of these issues are occurring with Perfect World (NASDAQ: PWRD). This international gaming company offers a potential dividend that investors are ignoring, and growth that short-term analysis doesn't take into account.
A recent article by The Motley Fool's Rick Munarriz shows the prevalence of short-term thinking in analysis of the gaming industry. “Game Over in China” pointed out the problems in Perfect World's current earnings release. He pointed to decreased revenue and profitability as current issues. He also said that things won't get any easier, as the company's guidance calls for a decline both sequentially and year-over-year. While Rick's facts are right, he is ignoring upcoming events and the company's little-known change in dividend policy.
Current Earnings & Competition
I'll admit that current earnings were not pretty. Revenue was down and average concurrent users dropped to a low that I haven't seen in the last four quarters. In addition, the company's gross margin dropped again to 81.3%, which was down from 82.3% in the first quarter.
When you compare these results to Activision Blizzard's (NASDAQ: ATVI), it's clear that these two companies play in different leagues. Activision saw non-GAAP revenue and earnings grow by 50%. Activision is also releasing their legendary Call of Duty franchise in China as a free-to-play game in conjunction with Tencent, a leading Internet services provider. The company expects to make Call of Duty free to play, but then monetize the platform through in-game purchases.
Chinese players are used to the idea of playing for free and then making in-game purchases to level up or add weapons, tools, and other items. Activision already licenses its popular World of Warcraft game through NetEase (NASDAQ: NTES) in China. One could assume that this one-two punch would be enough to knock Perfect World out. However, this ignores the titles and tie-ins that Perfect World expects to release next year.
Upcoming Game Releases
To say that next year should be a better year for Perfect World would be an understatement. The company intends to release both Legend of Condor Heroes and Return of Condor Heroes next year. Both games are based on the popular martial arts novels by author Louis Cha. These novels are well known in China and the company expects this local tie-in to drive greater adoption of the games.
In addition, the company expects to release the highly anticipated Swordsman Online and Saint Seiya Online in either the second or third quarter next year. The company's U.S.-based Cryptic Studios is working toward a second or third quarter of next year release for their impressive online shooter, Neverwinter.
The company also continues to license its games internationally. The most recent example is a Japanese subsidiary that will release their existing online game Dark Blood. The international growth focus is apparent at Perfect World, as more than 25% of revenues are now generated outside of China. This improved game lineup should dramatically increase revenues and earnings over the course of the next year and beyond. Even with all of these impressive games in development, there might not be a better reason to consider Perfect World than what I refer to as their hidden dividend.
The Company's New Dividend Policy
Perfect World's dividend actually isn't hidden at all. I've written about it before and the company laid out exactly what it plans to do in the future. The company said in its earnings report at the beginning of last year that, “we intend to distribute dividends annually in the future”.
For some reason this was misinterpreted as a one-time dividend. With competitors NetEase paying no dividend and Activision's yield at about 1.5%, this is a big difference between Perfect World and its competition. There are two reasons investors should consider this dividend. The first is the CEO Michael Chi owns about 18% of the outstanding shares. For someone with such a large interest in the stock, it's very likely that he pushed hard for annual dividends as this money goes directly into his pockets.
Second, the company's cash and investments indicate that Perfect World can afford a dividend in April 2013. One of the biggest issues with understanding Perfect World is the company reports its cash and investments over multiple line items. They hold cash, money markets, CDs, short-term and long-term investments. If you add up all of these line items, the total is over $561.8 million as of this last quarter. Prior to the last annual dividend being paid, this balance stood at about $364 million.
In theory, Perfect World could spend as much as $200 million on capital expenditures between now and the end of the year and still have as much cash on hand as they did last year. The company's average capital expenditures haven't been more than $100 million in an entire year over the last three years.
18%+ Dividend Seems Possible
Last year Perfect World paid out $98 million. With about 48 million shares outstanding, this same size payout next year would be equivalent to a dividend of about $2.04. With the stock selling for $10.96 this would represent a yield of 18.61%!
Last year when this dividend was announced, the stock jumped about 18% in anticipation. Investors who understand that this could happen again have the opportunity to benefit from this knowledge today. The shares trade for a forward P/E ratio of just 5.15, and though earnings results have been inconsistent, the company has actually beaten expectations by $0.04 over the last four quarters.
Bottom line is investors can buy a company for about 5 times earnings, with significant potential earnings growth, and gain a potential 18%+ dividend. This is why I hold shares personally and I suggest you consider them for your portfolio as well. If you wait until the beginning of next year, it's likely the dividend will have been announced, at which point it will be too late.
MHenage owns shares of Perfect World. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.