Shares in Games Workshop (LSE:GAW) are down 12% over the last year. But as interest rates in the UK start to fall, I think they could be a great way of earning a second income.
I think the company has a decent claim to be the best business on the UK stock market. And buying 267 shares could generate £1,000 per year in dividends.
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The business of models
Games Workshop owns the Warhammer franchise. Quantifying the value of an intangible asset might be difficult, but there are some key metrics investors can pay attention to.
Warren Buffett says good businesses as ones that earn high returns on equity. And the best investments are ones where companies can keep doing this as their book value grows.
Games Workshop has done exactly this. Over the last 10 years, the company has been growing its book value, from around £55m to just over £230m.
Games Workshop shareholders’ equity 2014-24
Created at TradingView
During this time, the firm has consistently achieved a return on equity of over 25%, well above the FTSE 100 or the FTSE 250. In other words, its growth hasn’t slowed it down.
Games Workshop return on equity 2014-24
Created at TradingView
Games Workshop’s intellectual property prevents direct competition. And this has led to excellent business performance over the last decade, with shareholder returns to match.
Revenue breakdown
Games Workshop isn’t exactly a diversified business. While it does generate revenue by licensing, substantially all of its sales come from making and distributing models.
In any environment, the challenge with selling a product that people don’t strictly need is to convince them to keep buying. But this is especially true in an economic downturn.
Furthermore, around 44% of Games Workshop’s revenue comes from the US. And other firms have been reporting slow sales in the area due to slow consumer spending.
So far, it has to be acknowledged that the company isn’t showing any signs of struggling. Its latest update – to the start of June 2024 – reported 11.6% top-line growth for the year.
Investors would be unwise to overlook Games Workshop’s concentrated business entirely. But in fairness, the firm has shown some impressive resilience so far.
Passive income
In my view, where Games Workshop really stands out is from a dividend perspective. The company currently distributes £3.75 per share to its owners.
At £3.75 per share, I’d need 267 shares to earn £1,000 per year in passive income. At today’s prices, that would set me back £26,780, which is a lot.
Games Workshop dividends per share 2014-24
Created at TradingView
Importantly, though, it has an outstanding record of growing its dividend. As the company’s earnings have gone up, so has the amount it pays to shareholders.
Another thing worth noting is that I wouldn’t have to buy all of the shares at once. With an initial investment, I could use the dividends I receive to buy more shares over time.
This means I wouldn’t necessarily need to invest £26,780 to earn £1,000 per year from Games Workshop shares. But if I had the cash to do so, I’d think seriously about it.
