Dividend cheer boosts Games Workshop revival

A dividend surprise has extended the recent fightback for Games Workshop shares. Where next for this popular stock?

Games Workshop (LSE:GAW) backers - from Baillie Gifford to an army of small investors - were cheered today as the fantasy miniatures retailer signalled it is fighting hard against rising costs.

Its declaration of a 70p a share dividend from “truly surplus cash” takes the total for the financial year to 235p a share, which is better than house broker Peel Hunt’s 215p estimate and the 185p reported for last year. The latest dividend will be paid on 13 May.

Shares rose 7% as the payout and accompanying line that trading has been in line with expectations eased City worries about ongoing supply chain and cost pressures.

The FTSE 250-listed stock hit an all-time high of 12,200p in September but has been in sharp retreat since reaching that £4 billion landmark. It stood at 6,365p earlier this month amid the wider de-rating of growth stocks. 

At close to this low point, Baillie Gifford UK Growth Trust (LSE:BGUK) chose this month to double its stake from 5% to 10%, having first looked at Games Workshop in 2019. Other supporters include Keith Ashworth-Lord's CFP SDL UK Buffettology fund.

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They, and the company’s many retail followers, have been boosted by a 20% rebound for the shares in the past fortnight, with today’s improvement taking the stock back to 7,625p.

Peel Hunt thinks the shares should be at 12,500p, however. It said: “The rating looks highly attractive for a unique business, with a global growth opportunity, valuable IP and exceptional return on capital.”

The Warhammer company’s first half profits fell 4% due to tougher comparatives and a number of additional costs in the period.

Based on calculations from today’s dividend update, Peel Hunt is forecasting a 13% improvement in second half profits as year-on-year comparisons soften and currency and freight costs have less of an impact. In addition, the broker said a 5% price rise should recover some of the cost increases during the current year with the full benefit to come next year.

Products are sold through 5,400 independent retailers in 73 countries, accounting for more than half of the business. Its remarkable stock market success, including a 2020 valuation in excess of British Gas owner Centrica, owes much to rapid international expansion as well as income generated through computer games and other licensing deals.

Its main warehouse and distribution operations are in Nottingham but Games Workshop has two major logistics hubs in Memphis, Tennessee and Sydney, Australia serving the now three-quarters of company sales generated outside the UK.

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Games Workshop shares were only beaten on the FTSE 250 index risers board by private equity group Bridgepoint (LSE:BPT), which jumped 40.5p to 330p after reporting maiden results that were stronger than expectations at the time of last July’s stock market listing.

The company, whose investments include Burger King UK, increased assets under management by 23.7% and revenues by 41% to £270.6 million. Profits lifted 29% to £62.6 million.

Despite the better-than-expected trading performance in 2021, the shares are below their 350p IPO price of last July after falling by more than a third at one point this year.

Peel Hunt last week started coverage with a price target of 380p and said a valuation of 17.1 times 2023 earnings looked favourable against some larger European peers. It said the company’s strong track record made it a good way to gain public access to private equity.

The broker said: “The share price has been hit hard in the recent market turmoil. We see some of the concerns as overdone, and expect the shares to move back above their IPO price. To move much beyond that might require earnings upgrades, which we do not expect for now.”