Should Income Investors Look At Games Workshop Group PLC (LON:GAW) Before Its Ex-Dividend?

Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Games Workshop Group PLC (LON:GAW) is about to go ex-dividend in just three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Games Workshop Group investors that purchase the stock on or after the 4th of August will not receive the dividend, which will be paid on the 12th of September.

The company’s next dividend payment will be UK£0.90 per share, and in the last 12 months, the company paid a total of UK£1.65 per share. Based on the last year’s worth of payments, Games Workshop Group has a trailing yield of 2.1% on the current stock price of £77.45. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.

Check out our latest analysis for Games Workshop Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That’s why it’s good to see Games Workshop Group paying out a modest 42% of its earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 105% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings – expenses don’t pay themselves – so it’s not great to see it paying out so much of its cash flow.

While Games Workshop Group’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Cash is king, as they say, and were Games Workshop Group to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That’s why it’s comforting to see Games Workshop Group’s earnings have been skyrocketing, up 33% per annum for the past five years. Earnings have been growing quickly, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Games Workshop Group has delivered an average of 10% per year annual increase in its dividend, based on the past 10 years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Should investors buy Games Workshop Group for the upcoming dividend? We’re glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it’s not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall, it’s not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

On that note, you’ll want to research what risks Games Workshop Group is facing. For instance, we’ve identified 2 warning signs for Games Workshop Group (1 is potentially serious) you should be aware of.

If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.