The FTSE 250 can be a great place to look for stocks to buy. And Games Workshop (LSE:GAW) is a terrific example.
Over the last 10 years, the company’s stock is up by 1,623%. And I think it could still be a great investment even at today’s prices.
Shareholder returns
If I’d invested £1,000 in Games Workshop shares 10 years ago, I’d have an investment with a market value of £17,242 today. That’s a terrific return, but the rising share price is no accident.
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Since 2014, the company has increased its earnings per share by 1,536%. And having relatively few fixed assets to maintain means it has been able to pay significant dividends to shareholders.
Over the last 10 years, Games Workshop has returned dividends totaling £14.77 per share to its investors. So if I’d used £1,000 to buy 195 shares a decade ago, I’d have received a total of £2,880.
Adding this to the £17,242 I’d be able to sell my investment for today implies a total return of £20,122 on a £1,000 investment. That’s an incredibly good return for a 10-year investment.
Outlook
It’s difficult to expect the same extraordinary returns going forward. But the foundation of Games Workshop’s impressive growth – its Warhammer 40,000 franchise – is still in place.
Intellectual property protection makes it impossible for other companies to replicate the company’s products. That means there’s no danger of customers switching to a competitor.
The rights to the Warhammer franchise are an intangible asset, meaning they don’t wear out the way a physical asset like a machine does. As such, they don’t need replacing on a regular basis.
This is why Games Workshop has such low capital requirements. And while the company might be making more money, this is just as relevant as it was a decade ago.
Valuation
FTSE 250 stocks can sometimes go under the radar, but it’s probably fair to say a lot of investors have heard of Games Workshop. Despite this, I think the share price today is eminently reasonable.
The stock trades at a price-to-earnings (P/E) ratio of 23. That’s reasonably high, but those low cash requirements mean this equates to paying £3.2bn for a business generating £181m per year.
With this type of company, there’s always a risk that a difficult period for the economy could cause demand to fall. If this happens, I expect the dividend to fall and the share price to follow.
Over the long term, though, the company has some impressive attributes that make it extremely attractive. It’s an unusual example of a stock that I’d be willing to pay a high earnings multiple for.
A stock to consider buying
Warren Buffett says the best businesses to invest in are ones that grow without needing additional capital to support that growth. That’s exactly what Games Workshop has done over the last 10 years.
I’m doubtful that the company can generate the same return again. But it still generates huge returns on its tangible assets, which makes it a stock investors should consider carefully.
