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3 Reasons To Buy Activision

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

Doing both of things together will help you earn higher than average investment returns and build your wealth.

There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.

The key to continue compounding your capital is to keep investing well over time… Combine this with dividends and you’re well on your way to building a retirement account you can live off.

And this is huge part of things.

But another huge part of this is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.

Both things are necessary to build wealth. But most only think of investing well. 

Today, I want to show you 3 Reasons To Buy Activision – And 1 Not To.

Activision Blizzard (ATVI) is one of the worlds leading video game developers.

Some of its leading games franchises are…

  • World Of Warcraft
  • Call of Duty
  • Diablo
  • Candy Crush

Among many others.

The company is based in Santa Monica California.  It has a $63.7 billion market cap.  And it also pays a 0.5% dividend.

This is reason #1 to buy Activision – because of its dividend.

Qualcomm’s 0.5% Dividend

Over the last decade Activision’s paid out a total of $2.39 per share in dividends.

At today’s share count of 774 million shares that’s equal to $1.9 billion paid out to shareholders in the last decade.

Plus, in the last decade it grew its dividend 173% from $0.15 per share in 2010 to $0.41 per share now.  This is an annual dividend growth rate on average of 17.3% per year.

And it should continue upping its dividend going forward as well.

Why?

Because as of this writing its only paying out 17.5% of its earnings as dividends to shareholders.  A decade ago, it was paying out 45.6% of its earnings as dividends.

The payout percentage went down even though its earnings per share rose 609% from $0.33 per share in 2010 to $2.34 per share in the last 12 months…  So look for this payout to increase significantly over time.

These dividend payments will provide you a solid retirement income in normal times if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

Both help you earn higher returns over time and will especially help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns huge profits and cash flows.  Which is reason #2 to buy Activision.

Activision Earns High Profits

Over the last decade it earned an average operating income margin of 25.5% per year.

I look for anything above 10% on a consistent basis so Activision surpasses this number.

Why 10%?

Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit margins above 10% over long periods of time.

This makes Activision a great operating business.

But it also means the company earns enough money from its operations to continue investing in the business for growth… Without having to issue debt or equity.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 25.8% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.

If companies are consistently above 5% on this number, it makes the company a cash machine that spits out more and more cash from its operations.

Activision surpasses my thresholds on both important metrics and that makes it an incredibly safe investment.

These profits also allow it to continually reinvest in operations.  And to pay you a large and growing dividend as well as I mentioned above.

Its large profits and cash flow and growing dividend payments over time make Activision a safe income play in whatever is to come in the next few months or years.

But these profits also allow another layer of safety because Activision’s business should be largely protected from negative effects of the coronavirus… Which is reason #3.

The Coronavirus Won’t Harm Activision

People may stop paying their mortgages.

They may stop paying their credit cards.

They may stop paying their vehicle loans.

And they may stop paying their student loans.

Because of the mass unemployment caused economic issues we’re now dealing with; people may stop paying these things if they need to.

And people may stop traveling and doing other entertainment related things outside of their houses…

But they won’t stop playing video games.

This was illustrated on August 4th 2020 when Activision released record 2nd quarter financial results.

Revenue was up 35.7% from $1.4 billion in the 2nd quarter of 2019 to $1.9 billion in the 2nd quarter of 2020.

Earnings per share was up 74.4% from $0.43 per share in the 2nd quarter of 2019 to $0.75 per share in the 2nd quarter of 2020.

Why did its revenue and earning per share rise so much?

Because people worldwide have now largely been confined to their houses for the better part of 5 months due to the coronavirus.

And one of the best ways to entertain yourself when you can’t leave your house is through video games.

Another factor that will positively affect gaming companies in the future is the release of the next generation consoles later this year.

Historically when new consoles release, revenues and profits rise for video game developers.

And this should have a huge positive impact on leading game developers like Activision more than most.

These things combined give enormous stability to the company in these highly uncertain times.  And it also means you should expect Activision to continue earning enormous profits and cash flows.

But what about its valuation?  Is it cheap? 

Activision Is Not Cheap

This is the 1 reason to avoid Activision stock for the time being…

With the markets at or near all-time highs you’d expect a fantastic stock like Activision to be selling at an enormous valuation.

And it is.

As of this writing its P/E is 35.

Its P/CF is 30.

And its forward P/E is 29.9.

On all three metrics I look to buy investments below 20 to consider them undervalued.

This shows that Activision is currently overvalued… By a wide margin.

This means Activision stock does not offer you a margin of safety in investing terminology.  And this makes the investment riskier.

Conclusion

If you’re looking for a solid, safe, stable, dividend paying, and enormously profitable investment to protect your investment portfolio – consider investing in Activision … But only when its stock is cheaper.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.


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