Shares of Games Workshop (LSE: GAW) climbed as much as 10% to over 1,460p by noon today after the wargaming firm released excellent results for its financial year ended 28 May. The company also said, in a separate announcement, that trading since the year-end has continued strongly and that “profits for 2017/18 are therefore likely to be above market expectations.”
For 2016/17, the company reported a 34% increase in revenue, benefitting from favourable exchange rates, as 75% of its sales come from outside the UK. At constant currency, the increase was a still-impressive 21%. Net operating cash flow soared by 81% to 136.6p a share from 75.5p, putting the company on an attractive price-to-cash flow (P/CF) multiple of 10.7. Equally attractive is an 80p dividend that gives a running yield of 5.5%.
Game on
Games Workshop’s business is appealingly simple, as is the explanation of it provided by Kevin Rountree, a company veteran who became chief executive in January 2015.
Mr Rountree said in today’s results: “Games Workshop’s ambitions remain clear: to make the best fantasy miniatures in the world and sell them globally at a profit, and it intends doing so forever … All of our decision-making is focused on the long-term success of Games Workshop, not short-term gains.”
On the subject of shareholder value, he said: “We believe shareholder value is created, primarily, by not destroying it. We have no intention to acquire other companies, nor to dispose of any of those we own. We return our surplus cash to our owners and try to do so in ever increasing amounts.”
Attractive buy
For over a quarter of a century, Games Workshop has demonstrated its ability to nurture new generations of hobbyists, expand its business across the globe and, more recently, generate a rising income stream from licensing its IP for digital media without cannibalising its core business.
With plenty of scope for continuing global expansion — and rising disposable incomes in many markets providing a favourable backdrop — I see Games Workshop as an attractive stock to buy for the long term.
Affordable dividend
Royal Mail‘s (LSE: RMG) growth in its last financial year was considerably more modest than Games Workshop’s. The FTSE 100 giant posted an underlying revenue increase of 1% and a 5% rise in net operating cash flow to 76.2p a share from 72.7p. However, the P/CF multiple at a current share price of 392p is just 5.1, while the 23p dividend gives a running yield of 5.9%.
Royal Mail’s dividend is eminently affordable based on current cash flows, even after taking account of capital expenditure and other necessary costs, which reduced net operating cash flow of 76.2p a share to 42.4p. The company reckons this “in-year trading cash flow”, as it calls it, will support its progressive dividend policy.
Structurally challenged
However, the group’s letters business is in structural decline (the company forecasts volumes falling between 4% and 6% a year) and while the parcels division is growing, this is a competitive, commodity business.
I see Royal Mail as an attractive stock for a high income in the near and medium term. But due to the challenging industry fundamentals, I’m expecting its returns to be increasingly outpaced by those of Games Workshop in the years and decades ahead.
