I think the Games Workshop dividend could be set to soar

Christopher Ruane is optimistic about where the Games Workshop dividend might go. So why isn’t he buying the shares at the moment?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Caucasian woman with pink her studying from her laptop screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon.com and Games Workshop Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »