Just 18 months ago, I probably wouldn’t have called Warpaint London (LSE:W7L) a dividend stock. It was riding high near 600p after rocketing by almost 1,000% over the previous five years. As such, the dividend yield was pretty low, at 2%.
However, after since crashing 70% to 175p, Warpaint London is now yielding 7.4%, quite an eye-catching figure. What’s more, brokers are bullish on the stock, with an average 12-month target that’s 100% higher.
So is this worth considering for passive income in May? Here are my thoughts.
Things to like
Warpaint London sells affordable cosmetics through brands including Technic and W7 (61% of total group revenue). As I type, it has a market-cap of £141m, which puts it into small-cap territory.
Now, beyond the dividend yield, there are a number of things that look attractive here. First off, the firm sells products in Tesco, Boots and Superdrug, as well as in Europe, the US (Walmart), and elsewhere. Last year, it launched W7 in 200 Tigota stores in Italy.
So its revenue is internationally diversified and it has various blue-chip retail partners on board. The balance sheet‘s also in good shape, with no debt. That’s obviously important from a dividend sustainability perspective.
Another thing I like is that the business is founder-led. Co-founders Samuel Bazini (CEO) and Eoin Macleod (MD) have been in the beauty industry for decades.
Finally, the forward price-to-earnings (P/E) ratio here is just 9, which looks very low. For context, it was 25 back in September 2024.
As such, I can see why three City brokers following the stock think it’s undervalued. Their average price target is 100% above the present level. On 29 April, Berenberg Bank lowered its target from 510p to 470p. However, that’s still roughly 168% above the current 175p!
In the wars
So why has the stock crashed? Slowing growth is the main culprit. Last year, revenue increased just 3% to £105.1m (compared with 40% top-line growth in 2023). Bodycare, a large customer of its Technic brand, went into administration, resulting in the loss of £3.3m worth of sales.
While the gross margin ticked up 140 basis points to 42.6%, pre-tax profit slumped 24% to £18.1m. US tariffs on goods manufactured in China caused a massive headache.
2025 was a challenging year for Warpaint, against a backdrop of difficult macroeconomic conditions and subdued consumer confidence, both in the UK and our other markets.
Warpaint London.
Unfortunately, the beauty company said the tricky trading conditions had persisted into the first quarter of 2026. But management thinks things could improve in the second half.
Obviously, the biggest risk here is rising inflation and the never-ending cost-of-living crisis.
Is the yield sustainable?
Last year’s 13p dividend was covered just 1.28 times by adjusted earnings per share of 16.7p. Therefore, with weakness continuing into 2026, I wouldn’t bank on the 7.4% yield.
That said, the firm does remain profitable, so I would be surprised if the payout was scrapped altogether.
Moreover, the US tariff situation has eased and Warpaint continues to grow its presence in new international markets such as Australia and New Zealand.
Weighing everything up, the stock looks undervalued to me, making it worth considering as a cheap small-cap recovery play. Passive income would be an added bonus.
