In the long run, my Self-Invested Personal Pension (SIPP) is being built with dividend growth in mind. Beyond existing Dividend Aristocrats, there aren’t many companies capable of consistently raising shareholder payouts. And in most cases, the yields aren’t terrific. But if a dividend growth strategy is successful, mediocre yields can grow into more substantial ones.
I’ve already spotted some businesses with this potential. But one that I’ve recently bought more of is Games Workshop (LSE:GAW).
Surging Warhammer demand
The mastermind behind the various Warhammer franchises has long proved itself to hold tremendous pricing power and customer loyalty. As a fellow collector and player of Warhammer 40,000, I’ve experienced the addictive nature of the hobby first-hand. So, it’s not hard to believe that despite being the nerdiest business on the London Stock Exchange, it’s also one of the best-performing shares over the last 20 years (second to Ashtead Group).
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A few weeks ago, the firm opened pre-orders for its coveted annual Christmas Battleforce boxsets for Warhammer: 40,000 and Warhammer: Age of Sigmar. Within less than five minutes, the two most popular armies sold out on Games Workshop’s own online store as well as via third-party retailers.
Needless to say, that’s a strong signal of demand from customers. And management confirmed it with a brief trading update a few days later that stated performance was once again ahead of expectations, sending the shares flying by more than 15% in a day. Yet this could be just the tip of the iceberg.
Its latest preview show at the World Championships finally revealed the highly anticipated new miniatures for Death Korps of Krieg, along with a surprise reveal of Eldar. Both appear to have been exceptionally well received by the community, indicating that another sell-out could be on the horizon in the first quarter of 2025. And with all the popular Chaos factions receiving new models throughout next year, growth doesn’t appear to be slowing down.
Valuation and volatility
Games Workshop’s ability to continue raising prices without deterring the majority of its customer base hasn’t gone unnoticed by investors. In the last five years alone, the share price has more than doubled even after being chopped in half during the 2022 stock market correction. As such, the stock trades at a premium valuation.
Even on a forward basis, the price-to-earnings ratio isn’t cheap at around 27.8, resulting in an an average dividend yield of 3%. By comparison, the FTSE 100 currently offers closer to 3.6%. In my opinion, the premium valuation is justified, given the quality of the underlying business. That does open the door to volatility. But continued double-digit earnings and dividend growth make it a risk worth taking, I feel.
Of course, there are other threats to consider. The falling cost of at-home 3D printing is becoming far more economically viable for hobbyists unwilling to pay the ever-increasing cost of Games Workshop’s miniatures. So far, this doesn’t appear to have significantly impacted its performance. But in the long run, it suggests, its tremendous pricing power is getting slowly chipped away.
Subsequently, management may have to eventually rely solely on higher order volumes to maintain growth in the long run. As such, if demand starts to wobble, the group’s tremendous track record of growth could come to an end. Nevertheless, I remain optimistic.
