Would Warren Buffett approve of this stock I’ve just bought?

After adding to his position in this FTSE 250 constituent, this Fool explores whether it’s a stock that Warren Buffett could be a fan of.

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I recently added to my position in Games Workshop (LSE: GAW) and I wondered if one of the greatest ever stock pickers, Warren Buffett, would approve of my decision.

While unfortunately, I’ll never get the opportunity to ask him directly, I think it may be a stock that he would be a fan of. Let me explain why.

A strong advantage

There are multiple reasons why I think this. The business operates in the miniature wargames industry. In the space, it’s the front runner by a clear margin. Buffett tends to target companies with a moat. Games Workshop certainly has that.

Over the past decade, that has given it a major advantage to continue growing and put it in a strong position to keep delivering in the times ahead. Over the last five years, it has averaged nearly 17% revenue growth each year.

What’s more, it has plenty of cash to hand and zero debt on its books. That bodes well for future growth prospects.

A solid business

Buffett also promotes buying businesses over stocks. He says investors shouldn’t purchase shares just because they believe they’ll rise. Instead, we should buy businesses we understand, and that we think can thrive over the long run.

It’s a method that has worked for him. His company, Berkshire Hathaway, has produced returns of 20% on average, double the S&P 500.

That’s another reason why I like the FTSE 250 stalwart. Despite its recent success, it’s not slowing down. Lately, it has been looking to expand its licensing business.

The biggest move it has made is its deal with Amazon, which will see its Warhammer franchise turned into a string of TV and film content.

Making extra money

Buffett once famously said: “If you don’t find a way to make money while you sleep, you’ll work until you die.” Therefore, I’m pretty certain he’d be a fan of Game Workshop’s 4.3% dividend yield.

Buffett owns many stocks that reward shareholders with dividend payments. Last year, he received a reported $776m from his Coca-Cola holding alone. As such, I’ve made a conscious effort to focus on buying stocks that will earn me passive income.

I especially like Games Workshop as it uses only “truly surplus cash” to pay shareholders. Dividends are never guaranteed. Therefore, this, coupled with its impressive track record of rising dividends over the last decade, gives me confidence that its payout will be sustained going forward. 

The issues

Of course, aside from the obvious issue that Buffett doesn’t invest in UK companies, there are a few other reasons why he and other investors might be deterred from snapping up Games Workshop.

The stock looks expensive. It currently trades on 23.2 times earnings, above the FTSE 250 average of around 12.

What’s more, it’s prone to a downturn in spending, especially if inflation rises again and eats away at consumers’ pockets. We saw its share price take a hit at times last year after sales slowed.

A top-quality business

But Buffett has advocated before that he’s happy to pay the price for quality. And I think Games Workshop is one of the finest businesses on the Footsie.

Although I’ve recently increased my position, I’ll be looking to top up again soon with any investable cash I have.  

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. Charlie Keough has positions in Games Workshop Group Plc. The Motley Fool UK has recommended Amazon 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.

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