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23% per annum: is this FTSE 250 stock too good to turn down?

FTSE 250 constituent Games Workshop has posted an impressive return over the last five years. This Fool takes a closer look at its performance.

Posted by
Charlie Keough
Charlie Keough is a freelance investment writer. Prior to joining the Motley Fool UK, he worked for a global asset management company. He has also spent time working at a corporate finance boutique focused on sell-side M&A. He aims to buy blue-chip high yield stocks that he can hold in his portfolio for the decades to come.
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I think the FTSE 250 is home to some of the most exciting companies the UK has to offer and is a great place for investors to go shopping for shares.

Unlike the FTSE 100, many of the businesses on the index go under the radar. As such, I reckon it’s smarter to snap up these stocks and hold them for the long run.

One example is Games Workshop (LSE: GAW). I already own shares in the miniature wargames manufacturer. I think investors should consider buying it today.

Beating the market

I can see why investors looking at the stock’s performance so far in 2024 may question if Games Workshop is a smart investment. After all, its share price is down 2.5% when the wider index has soared 5.6%.

But I don’t focus on short-term share price movements. When I invest, I do it with the bigger picture in mind. Every stock I buy, I intend to hold it for at least five years. Ideally, it’ll be longer.

But how has Games Workshop performed over that timeframe? Well, over the last five years, its shares are up 115%. That’s a rise of 23% per annum on average.

For comparison, the FTSE 250 has returned 7.8% over the same period, an average of around 1.6% per year.

Extra income

What’s even better is that return doesn’t factor in the stock’s impressive dividend yield. Over the last five years, its average yield is 3.2%.

That means a £10,000 investment in the stock, assuming dividends were reinvested along the way, would be worth £23,233 today. The same investment in the FTSE 250 would be worth £12,513.

Time to buy?

So, is Games Workshop too good to turn down?

Well, potentially. Of course, I want to make it clear that past performance is by no means any indication of future potential gains. That said, I’m bullish on the long-term outlook for the business.

There are a few reasons for this. Firstly, in the miniature wargames industry, Games Workshop is the market leader with little competition. This gives it a moat over its competition. That may be why it has experienced strong revenue growth, averaging 16.7% over the last five years.

The business has also proved its resilience in recent times. For example, even during a cost-of-living crisis, Games Workshop posted a record revenue of £247.7m for the 26 weeks to 26 November 2023.  

The company has an incredibly strong balance sheet with ample cash and zero debt. As such, it uses only “truly surplus cash” to reward shareholders.

That’s why I like the stock as a passive income play. It currently yields 4.4%, higher than the FTSE 250 average (3.2%).

Not without risks

There are some risks I see with the stock. Trading on 22.7 times earnings, its shares look expensive. That’s higher than the FTSE 250 average of around 12.

While the business has also posted impressive growth, I’m conscious that given the current uncertain economic environment, it could be hit with a slowdown in sales.

Paying the price

But I’m comfortable paying the price for quality. And with Games Workshop, I reckon I’m getting just that. I already own the shares, but would happily add more to my portfolio if I had the cash.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.