Some investors live in a fantasy world – but others buy shares in one. Or, more specifically, they invest in Games Workshop (LSE: GAW). I’ve been eyeing the shares and one thing I like about them is the income prospects. I think the Games Workshop dividend might soar over the next few years. Here’s why.
Paying out spare cash
Different companies take a variety of approaches when it comes to declaring a dividend.
A lot of them stick to payments on a set schedule. If they have a lot of spare cash in the business, they might hang on to it for future use, or boost the ordinary dividend. Others declare a one-off special dividend.
Games Workshop has a fairly unusual approach, which it describes as “distributing truly surplus cash”. In other words, the retailer distributes money it thinks it does not need in the business as and when it decides to, usually on a fairly regular basis.
That can mean frequent payouts (the company paid five dividends last year). It can also lead to sudden jumps. Last month, the firm announced a dividend alongside its interim results of £1.30, double the payout at the same point last year.
But the downside of such an approach from an investor’s perspective is that the Games Workshop dividend can move around in unpredictable ways. Last year’s payout, for example, was 30% smaller than the prior year – but still a 14% increase on the dividend paid the year before that.
Promising business outlook
Enough about the past. What about the future for the dividend?
The company benefits from a number of attractive elements in its business model. For example, its proprietary Warhammer brand gives it the sort of competitive ‘moat’ loved by investor Warren Buffett. Owning a unique brand with a large base of existing players could help the company make sizeable profits for years to come.
The firm has announced a tie-up with Amazon to develop its intellectual property, including Warhammer, into film and television projects. That could be great news for profits at Games Workshop. It also shows why intellectual property can be such a compelling business asset.
Games Workshop has already developed its imaginary universes. That means it could reap profits from them being brought to life on the screen by a third party like Amazon without having to spend lots of extra money. A film or television series could bring in lots of new players, boosting revenues further.
Dividend prospects
If that comes to pass, I expect a big jump in the Games Workshop dividend. After all, the company aims to distribute surplus cash – and it could have lots of it.
But that might not happen. For now, the Amazon deal is just an agreement. There is no guarantee yet that Warhammer will reach the silver screen. I see some other risks too, like the concentrated manufacturing operation. Any unexpected interruption to production at its main factory could dent sales and profits.
Overall though, I like the company’s business model and think it has good dividend prospects.
But the shares have soared 65% since the end of September and now trade on a price-to-earnings ratio of 24. That is too high for my tastes, so I will not be investing at the moment.
