How I Tried to Hit the Jackpot for Dividend Income

As time goes by, the excuses I will accept dwindle for why a company should eschew a dividend.
My growing bias for dividend income manifests in my writing: I’ve written on dividend misconceptions (here, for instance); why even the best-run companies should pay dividends (here); and dividends’ undeniable contribution to wealth creation (here).
But I have yet to write on how dividends inoculate management against rampant stupidity … until now.
This past weekend I was sorting and organizing my personal papers, mostly investing notes and ledgers on stocks I had followed over the years.  And lo and behold there it was – notes on Jackpot Enterprises, a company I had followed intermittently through the 1990s.
I remembered that at the time I was enamored with Jackpot Enterprises. Like most things you’re enamored with, you’re frequently left feeling frustrated. I remembered that Jackpot left me feeling frustrated.
The attraction was understandable: Jackpot was the No. 1 slot-machine route operator in Nevada. It owned and maintained the slot machines you’d find in Nevada’s grocery stores, convenience stores, and bars: a slow-growth business, but also a cash-generating one.
Jackpot generated a lot of cash because it generated high returns on invested capital. Capital expenditure requirements were minuscule, which meant Jackpot could operate with no long-term debt and very little revolving credit. The market price of Jackpot shares – typically traded between $10 and $15 – were composed half of cash, and the cash continually rolled in.
Unfortunately, little of the cash rolled out to investors. Jackpot’s board of directors should have been buying back shares and raising the dividend annually. Instead, the board followed a haphazard policy of paying a stingy cash dividend one year only to rescind it (or to substitute a stock dividend) the following year.
Now and then, my frustration would overflow, so I’d call investor relations or write a letter to the board chairman. I’d thoughtfully (at least to me) explicate my position: Dividends and share buybacks would enrich all stakeholders, including management, which owned a sizable Jackpot stake. Dividend increases and buybacks, so I reasoned, would lift Jackpot shares out of their $10-to-$15-range funk.
So, where did my importuning get me? Jackpot management must have viewed me as a contrarian indicator. In June 1997, management announced it would eliminate the dividend in order to increase cash reserves (something strong companies like these would never do). I was flabbergasted. What could be more irrational than a cash-bloated company adding to the bloat?
In hindsight, I should have been less flabbergasted. Internet mania was, after all, in full fever. Dot-coms with nary a sale to their name, much less earnings, were raising hundreds of millions of dollars from venture capitalists and then going public with a billion-dollar market cap. (Remember Webvan, eToys, Pets.com, GeoCities? I didn’t think so, but fortunes were made and lost on each.)
By the close of the decade, Jackpot management found itself overcome with fever. So, in 2000, the slot-machine routes were sold and the name was changed to J Net Technologies. And what was J Net’s business mission? To serve as an incubator for startup business-to-business Web-based enterprises.
Management’s timing was impeccable. A year later, the Internet bubble burst, and so did J Net’s ambitions. By 2004, J Net had been reduced to a bulletin-board-traded penny stock. J Net subsequently changed its name to Epoch Holding Corp. and its incorporation to Delaware from Nevada.
I don’t know what has become of Epoch Holdings, nor do I know who bought Jackpot’s slot-machine routes. I imagine, though, whoever bought the slot-machine routes fared a bit better than whoever invested in J Net’s incubated businesses.
And to think that a sound dividend policy (my policy) could have inoculated Jackpot’s management against the mania du jour. Dividends win yet again.

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