Stock Analysis

Is Games Workshop Group PLC (LON:GAW) An Attractive Dividend Stock?

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LSE:GAW
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Is Games Workshop Group PLC (LON:GAW) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

While Games Workshop Group's 1.9% dividend yield is not the highest, we think its lengthy payment history is quite interesting. That said, the recent jump in the share price will make Games Workshop Group's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

LSE:GAW Historical Dividend Yield, January 30th 2020
LSE:GAW Historical Dividend Yield, January 30th 2020

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 51% of Games Workshop Group's profits were paid out as dividends in the last 12 months. 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.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Games Workshop Group paid out 81% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Games Workshop Group's dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was UK£0.25 in 2010, compared to UK£1.25 last year. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time. Games Workshop Group's dividend payments have fluctuated, so it hasn't grown 17% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Games Workshop Group has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

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 58% a year over the past five years. Earnings per share are sharply up, but we wonder if paying out more than half its earnings (leaving less for reinvestment) is an implicit signal that Games Workshop Group's growth will be slower in the future.

Conclusion

To summarise, shareholders should always check that Games Workshop Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Games Workshop Group is paying out an acceptable percentage of its cashflow and profit. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Games Workshop Group out there.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Games Workshop Group stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

About LSE:GAW

Games Workshop Group

Games Workshop Group PLC, together with its subsidiaries, designs, manufactures, distributes, and sells miniature figures and games in the United Kingdom, Continental Europe, North America, Australia, New Zealand, Asia, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth3
Past Performance2
Financial Health6
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet average dividend payer.