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The GameStock Stock Split May Serve to Chase out Institutional Short-Sellers

GameStop announced a three-share dividend for each share held. This is somewhat different than a four-for-one stock split from a tax standpoint and for those that are short GameStop. The move has an immediate impact on those that own the stock (largely individual investors), and on the many that are still short the stock (largely institutional investors). The announced split, or the split dividend, where holders would receive three additional shares of (GME) after the market close on July 21, has caused some confusion among the retail holders of the stock – and is likely causing some pain among those that are short GameStop. Shares are up near 8% today (July 7) on the news.

Source: Gamestop.com

What to Know

GameStop shareholders voted in June in favor of allowing expanded share authorization to one billion outstanding shares from 300 million. This authorization allows for the announced split. During the spring, management asked for authorization saying the split would “provide flexibility for future corporate needs.”

The foreshadowing of this split should have made the high percentage of short-interest in GME retreat some. Recent Morningstar data shows that 21% of GameStop’s entire stock float was being shorted. A short interest percentage above 15% is generally considered to be elevated. Short-sellers are responsible for compensating the lending broker for all dividends. This is generally simple with cash dividends but could be messy when the dividend is stock shares.

The additional shares will be distributed on July 21, and Gamestop stock will begin trading on a split-adjusted basis on Friday, July 22.

The dividend will have the effect of reducing the cost of each share after the split, this will make it easier for smaller investors to purchase shares of the company. The heightened access to shares could positively impact the market value of all shares outstanding post dividend-split.

Management Difference

Ryan Cohen became the chairman of GameStop’s board a year ago. The company has been modernizing by adding executives and employees with backgrounds in technology, e-commerce, and blockchain. It’s a classic fight for survival for the company that began its lifecycle as cutting edge and later found itself stodgy and old. Newer products are being added to the company’s line-up designed to put them back as a solid competitor in today’s gaming retail world.

Following the appointment of Cohen, the company invested in fulfillment and customer care, as well as expanding its offerings to include TVs, computer supplies, and even a marketplace for NFTs.

Management’s decision to provide a split in the form of a dividend raises additional challenges for short sellers of GME. The value of stocks tend to rise after a split welcomes smaller buyers that may have been locked out. This could serve to cause a squeeze on short players already forced by rising margin interest rates. As a dividend, rather than a split, there is an obligation for short sellers to make those they borrowed the stock from whole. This could cause many short positions to be closed out before the record date of the dividend.

Paul Hoffman

Managing Editor, Channelchek

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