Could Games Workshop Group PLC (LON:GAW) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A 1.5% yield is nothing to get excited about, but investors probably think the long payment history suggests Games Workshop Group has some staying power. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Games Workshop Group paid out 54% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Games Workshop Group paid out a conservative 42% of its free cash flow as dividends last year. It's positive to see that Games Workshop Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
With a strong net cash balance, Games Workshop Group investors may not have much to worry about in the near term from a dividend perspective.
We update our data on Games Workshop Group every 24 hours, so you can always get our latest analysis of its financial health, here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Games Workshop Group has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was UK£0.3 in 2011, compared to UK£1.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 19% a year over that time. Games Workshop Group's dividend payments have fluctuated, so it hasn't grown 19% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's good to see Games Workshop Group has been growing its earnings per share at 51% a year over the past five years. With recent, rapid earnings per share growth and a payout ratio of 54%, this business looks like an interesting prospect if earnings are reinvested effectively.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Games Workshop Group's payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Games Workshop Group has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 2 warning signs for Games Workshop Group that investors should know about before committing capital to this stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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