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Bob in IL
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Professor of finance and business at Parkland College, Champaign, IL. Occasional visiting lecturer at other schools like the University of Illinois in Urbana, IL.
  • Jump In For The Dividend. Giant Interactive 0 comments
    May 7, 2013 9:36 AM

    In late February, I bought 500 shares of Giant Interactive, a Chinese manufactuerer of online games, for about $6.20 per share. On February 26th, GA announced that they would issue a 42 cent dividend to holders of record on May 20th 2013. With the current price of $8, this amounts to about a 5% dividend. I feel that investors will buy into this stock over the next two weeks so that they can be on record as owning this stock on May 20th. If you are a holder of record on May 20th, you will receive the 5% dividend. Theoretically, a stock should fall after a dividend is paid. But I feel that so many investors will be buying this stock that the price two weeks from now, after the stock goes ex-dividend, will be higher than today. So, you will receive a 5% dividend for one month and hopefully, there will be some stock appreciation during this month as well.

    Another 'play' on this stock is to sell the June 22nd covered call option with a $7.50 strike price. If GA falls by the dividend amount of 42 cents from its current $8 stock price, then it should be worth about $7.50. This option will earn you an additional 55 cents. So, if you buy the stock for $8 and sell the covered call, you would end up with the 42 cent dividend, 55 cents for the call and $7.50 for the stock. Which, if everything works out is a 5% return for about one month with very little risk. Even if the stock fell in price to $7.05, you would still be ahead on this stock, if you bought it at $8.

    Giant Interactive reported earnings of 67 cents and a current price of about $8. That gives it a very respectable and cheap P/E ratio of 12. A Giant Interactive filing posted last year in September 2012 also stated that GA is engaging in a stock buy back or repurchase program. This is generally considered to be a bullish sign. This company is showing a gross margin of 86% and a net profit margin of 50%.

    Giant Interactive will host an earnings conference call on May 7th at 9pm Eastern time. Replays of this conference call will be available on the company's website starting around May 15th.

    Do your due diligence on this stock. It's financial statements are 'unaudited'. I do expect a run up in the stock between now and May 20th. The stock is up over a $1 or 20% over the last two months. How many of those investors will stay with the stock after May 20th is a big unknown. But if it continues to increase at 10% a month and if you can get a 5% dividend, this stock may be a good addition to a risk tolerant portfolio. Or play the covered call option and be out of the stock on June 22nd.

    I do own shares of this stock and I do not plan to sell these shares in the next two months.

    Disclosure: I am long GA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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