A £10,000 investment in Games Workshop (LSE:GAW) shares made five years ago has a market value of £18,285. Add in £2,307 worth of dividends and the total return is over 100%.
That’s an outstanding return. And I think investors looking for shares to buy can learn a lot from what the stock – and the underlying business – has done since 2020.
Lesson 1: valuation
Games Workshop shares might look expensive at a price-to-earnings (P/E) ratio of around 28. That’s well above the FTSE 100 average and investors would be brave to bet on the multiple expanding further in the future.
Importantly, though, the stock was trading at a similar level in 2020 – and investors have done very well with it since. The reason is the company’s sales and profits have grown impressively since then.
Games Workshop P/E ratio 2020-2025
Created at TradingView
Revenues have more than doubled and earnings per share are up 143%. This is why the share price has climbed substantially despite trading at a high multiple five years ago.
The lesson for investors is that a high P/E ratio doesn’t automatically mean a stock is overvalued. If the business can keep growing, its shares might be a bargain even at a high earnings multiple.
Lesson 2: dividends
With dividends, it’s natural for investors to look for two things. One is a long record of increasing returns and the other is a wide gap between the amount a firm makes and the amount it pays out.
Games Workshop has neither – over the last five years its distributions have fluctuated and it has returned almost all of its net income to shareholders. But it has still been a great dividend stock.
Games Workshop’s EPS vs. dividends per share 2020-2025
Created at TradingView
Since 2020, the company’s dividends have totaled around 23% of its market cap. And while the growth hasn’t been steady and consistent, it has been substantial over time.
The lesson for investors is that there’s more to dividend stocks than track records and payout ratios. What matters most is the quality of the business, which is where Games Workshop stands out.
Outlook
Games Workshop’s latest trading update reports strong growth across the board. Despite exchange rates weighing on reported figures, things are moving in the right direction.
The company doesn’t expect direct cost increases as a result of the National Living Wage increases, but it did warn that suppliers might raise prices as a result. This is potential risk going forward.
There’s also uncertainty around tariffs from the US as the new administration takes over later this month. As a result, management has held off giving guidance for the next six months.
Even if costs rise, I’m not expecting inflation to reach its 2022-2023 levels. And having seen Games Workshop cope admirably during that period, I expect something similar if costs rise in 2025.
A model business
I own shares in Games Workshop in my portfolio. And while I have my eye on a number of stocks from a buying perspective, few businesses are as strong as this one.
It’s not unreasonable for the share price to fall as a result of uncertainty about the prospect of higher costs. But next time I’m looking to invest, this will be on the list of stocks I’ll be considering.
