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Is Activision Blizzard the Video Game Dividend Stock Worth Playing?

On Wednesday, I took a look at dividends in the technology sector, showing that while dividend-paying tech stocks used to be few and far between, that’s begun to change. I highlighted Microsoft (Nasdaq: MSFT) as one company that’s starting to show serious dividend growth potential.

Now, in addition to the ubiquity of Microsoft’s Windows operating system, which is found in most every PC, an object common to living rooms everywhere is the Xbox 360 video game console. Yes, “everywhere” is an exaggeration, but not by much. Some 67 million Xbox 360 units have been sold worldwide and Microsoft nearly has a lockdown with a 47% share of the console market.

All in all, 2011 saw a total of $16.3 billion to $16.6 billion in retail video game sales. To put that into perspective, in the same year consumers spent only $9.5 billion on movie purchases. Suffice it to say, the video game industry is an entertainment industry force to be reckoned with.

On the other hand, it’s true that figures are declining. There was a 10% drop in 2011 from 2010 in sales, and this July there was a 16% decline in retail game sales compared to the same month last year. But don’t think that means that the industry is deteriorating.

Instead, the current generation of aging consoles (released 2005) are reaching the end of their life cycles and, in turn, generating less excitement than they once did. Consumers, by now accustomed to the game console release cycle, are gearing up for the next generation (expected 2014). Once new life gets breathed into the industry, sales figures are destined to climb.

Another factor hurting retail sales: There’s a growing movement from retail to digital content distribution, both for consoles and PC games. Consumers are exhibiting a growing preference for making purchases online via Amazon, Valve Corp.’s Steam platform and the Xbox marketplace, for example.

Case in point: Even as retail sales decline, online purchases made in July rose 17% compared to the same month last year.

This trend hurts video game retailers the most. And as far as specialty video game shops go, with nearly 80% of video game retail market share, the only one worth mentioning is GameStop (NYSE: GME). As it happens, it’s one of the only companies related to video games that also pays a dividend. Unfortunately, GameStop’s future is highly uncertain (think Best Buy (NYSE: BBY) but on a smaller scale).

In other words, pay no attention GameStop’s attractive 4.38% yield. The company initiated the dividend program to entice investors to hold on to or buy in to its risky stock, but the risk for a long-term dividend investor simply isn’t worth it.

Besides GameStop, dividend-paying video game stocks are rare, to say the least. Excluding those that have paid special dividends and non-pure plays like Microsoft and Sony (NYSE: SNE), there are only two: Giant Interactive (NYSE: GA) and Activision Blizzard (Nasdaq: ATVI). Neither have a long history. And although Giant has the longer of the two, initiating payments in 2009, it hasn’t been paying consistently, so right off the bat, it doesn’t make the cut.

Activision Blizzard, on the other hand, shows potential as a dividend payer. It initiated annual payments in 2010. And they’ve increased each year since, growing 20%. True, three years isn’t quite enough to go on. But what’s most compelling is that among video game producers, Activision arguably has the strongest fundamentals.

Its triple-A game franchise lineup is stocked with some of the hottest titles in the industry, including “Call of Duty,” “World of Warcraft” and “Starcraft.” The fan base for these franchises tends to be fiercely loyal, driving sales figures to break new ground. In fact, “Call of Duty: Modern Warfare 3” sold more than any book, movie, or video game ever.

With a strong balance sheet, no debt and impressive free cash flows, the Activision Blizzard is absolutely worthy of adding to your watch list – despite its low-end yield of 1.15% and short history of payments.

What’s more, the stock is currently trading with a price-to-earnings of 16.5 compared to its five-year average of 25.6 and an industry average of 22.5.

Bottom line: There are almost no dividends to speak of in the video game industry, but Activision Blizzard proves to be a firm exception. Even while management hasn’t been forthcoming of what to expect for its dividends program, given two more years of proven annual increases and payments, ATVI could be worthy of a solid recommendation.

Best regards,

Ryan Anders