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Blockbuster Won't Pay Dividend, First Time Since 1999

By Reuters
Published | Updated

CHICAGO – Blockbuster Inc. (BBI) on Friday said it will not pay a dividend for the third quarter, the first time it has failed to do so since the largest U.S. video rental chain operator went public in 1999.

The decision, made by the company's board, is the latest sign of financial difficulty at Blockbuster. The company's shares closed down about 2.6 percent.

The drop in Blockbuster's share price cut its market capitalization below that of rival online DVD renter Netflix Inc. (NFLX) for the first time since the two began competing for the $9-billion U.S. rental market.

Netflix was worth about $1.4 billion compared with $1.1 billion for Blockbuster as of Friday's close, based on diluted shares outstanding in their last quarterly reports.

The company, which posted a $57.2 million loss in the second quarter, has suffered because of weak demand for new releases and a changing market where many opt to buy movies from low-price retailers like Wal-Mart Stores Inc (WMT).

Blockbuster paid a quarterly dividend of 2 cents a share on June 20. The company will save about $3.7 million by not paying the third-quarter dividend of that amount, based on 183.7 million average shares outstanding in the second quarter.

Blockbuster typically pays about $14 million per year in dividends. It paid shareholders a $5 per share dividend last year as part of its separation from Viacom Inc.

Blockbuster spokesman Randy Hargrove said the board's decision not to pay a third-quarter dividend was not related to recent waivers the Dallas-based company received for its debt covenants.

"A dividend was allowed under the terms of the covenant," he said on Friday. "That was not an issue."

One analyst said the timing of the move, a day before a U.S. holiday weekend, sends an unnecessarily bleak message to the market.

"The amount involved is so small, I think they sent a strong negative signal to the market for not a lot of money," said Michael Pachter, analyst at Wedbush Morgan Securities.

Pachter has a "buy" rating on the stock and said he has no quarrel with the company not paying the dividend. But he said the decision should have been announced in August, when the company reported second-quarter earnings.

Lehman Bros analyst Anthony DiClemente said the move to conserve cash showed that Blockbuster may be feeling pressure from its creditors "to straighten out their balance sheet."

"I don't see this as a negative or a positive," DiClemente said. "I see it as a reflection of the already lousy fundamentals in the business."

Blockbuster, which has spent an estimated $250 million this year in a battle over market share with Netflix, said in August that it was no longer on track to meet its 2005 financial targets, and its creditors agreed to waive certain debt covenants in the second and third quarters to avoid default.

"The board has determined that at this time it is more important to use the cash, which would have been used to pay a quarterly dividend, for the business," Blockbuster said in a news release. A spokesman declined to specify exactly how the money would be spent.

Blockbuster has been spending to develop its online movie business and broaden its game and movie trading offerings, both in stores and online. The company also decided late last year to give up lucrative late fees at its stores in order to attract more customers.

Blockbuster shares closed down 16 cents at $6.12 on Friday on the New York Stock Exchange (search). Netflix shares closed up 9 cents, at $21.54 on Friday on Nasdaq.