Everyone likes a dividend. It’s like a little present that confirms your good judgement.
But not everyone buys dividend stocks. Perhaps investors think that a company is less sustainable if it pays out to shareholders instead of reinvesting surplus cash.
Not so. Reliable dividends tend to attract long-term supporters. And there’s one great dividend stock that I believe every good investor should own.
Since 1975 Games Workshop (LSE: GAW) has been making and selling toy soldiers.
It doesn’t sound an impressive business model on the face of it, but a die-hard audience along with solid cash flow and little competition makes this stock a truly long-term buy in my opinion.
Games Workshop’s performance over the past five years made it a darling of fund managers everywhere. In 2018 it was the third-most profitable company on the FTSE 350 alongside household names like Rightmove and Moneysupermarket.com.
That said, it’s not good news for UK manufacturers right now. Games Workshop relies on plastic resin for its model armies, and a weak sterling in the face of Brexit has pushed up raw material costs. A thinly worded trading statement about ‘uncertainties’ in October 2018 rattled some, with shares falling 8.7%.
But an update in early April placated concerns. Sales and profits are up year on year, and new license agreements have pushed royalties higher. Pre-tax profits for the year ending 2 June are expected to be in the region of £80 million, 7% higher than 2018.
Games Workshop also plans to pay a 35p dividend, taking the total paid during the year to £1.55 per share.
At time of writing, shares are priced at 4,466p. Here are four reasons why I think that’s a fair valuation.
1. Geeks are big money
Gaming culture is no longer the sole preserve of spotty nerds rolling dice in shadowy basements. It’s mainstream. Films spun out from Marvel’s comic book properties, like Thor and Avengers: Endgame, brought in a hefty $21bn in the past 12 years.
Games Workshop has 40 years of intellectual property to draw on and is unafraid to go after copyright imitators. Customer retention is strong. Brand loyalty is high. Competition in the space is very low. Add in a slew of successful licenses for models based on Lord of the Rings and Dr Who and you have yourself a golden goose.
2. No competition
There are rival model companies in the UK. But none with the reach and name recognition of Games Workshop. A strong secondary market for reselling figurines exists on eBay, which echoes our point about brand loyalty.
3. Buying low, selling high
Consistent dividends. Rising profits on higher sales. Games Workshop is not afraid to source cheaper products for its millions of toy models. Switching from pewter metal to finecast plastic in 2011 saw profit per item rocket 300-500%.
4. Strong leaders
As non-exec chairman Nick Donaldson has revitalised Games Workshop. Donaldson took the helm from stalwart Tom Davis in 2017, when stock was 934p a share and growth relatively flat. His harder business edge has seen prices quadruple to an all-time high.
If you’re looking to supplement your salary or pension with regular dividends, then this special free investing report could be a great place to start! ‘A Top Income Share From The Motley Fool UK’ profiles a company that you’re bound to have heard of … but what you may have overlooked is the current near-6% yield on offer that our Motley Fool analyst believes is “comfortably covered by profits and by the firm’s cash flow”. Click here to claim your free copy now!
Tom has no position in any of the companies mentioned in this article. The Motley Fool UK has recommended Moneysupermarket.com, and Rightmove. 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.