Why Dividend Growth Could Be A Multibagger Signal

28th Jan by Roland Head

16 comments 2041 reads

An investor who invested in Games Workshop (LON:GAW) 10 years ago might have paid around 500p per share for their shares.

If they’d held on to those shares, they would have received 420p per share in dividends alone during the company’s 2024 financial year.

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Assuming broker forecasts are correct, our lucky long-term investor will receive 471p per share for the 2024/25 financial year. That’s a dividend yield on purchase cost of 94%.

I’d imagine this yield figure could easily reach 100% over the coming years. That would see our model investor receiving the entire cost of their original investment back in cash each year.

That’s not all. Since January 2015, Games Workshop has paid a total of 2,281p per share in dividends. That means these shares have been a dividend multibagger over the last decade, generating a 350% return from income alone.

Alongside this of course, Games Workshop shares have multibagged themselves. More accurately, the stock has been a 28-bagger, delivering a 2,750% profit over 10 years.

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How significant is dividend income?

When set against the scale of Games Workshop’s share price gains, the income generated by the stock may first seem like a sideshow.

Indeed, I suspect that many growth-focused investors sometimes see dividends as an incidental. Nice to have, but not really relevant to the investment case.

I can understand the reasons for this. But what if dividend growth was actually an indicator of underlying growth potential, rather than just a symptom?

Alex and I have been doing some research that seems to suggest exactly that. We’ve found that companies that are able to deliver strong, sustainable dividend growth may also be those with above-average growth potential – possible multibaggers.

Here’s a summary of the approach we took:

Alex gathered data on dividend-paying UK shares that have been listed for the last 10 years and ranked them by compound average dividend growth over that time.
We then took the top 30 and bottom 30 stocks in terms of dividend growth and compared them using various fundamentals, both out the outset (2014) and on a 10-year average view (2014-24).
Finally, we compared the total return (share price change plus dividends) from our top…

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flashing blade

28th Jan

Great article thank you. In your research did you pull together a screen you can share?

Rusty2

Roland, thanks an interesting article. I have often thought growth companies were better investments, for income, than the high dividend, low growth companies, that are in the FTSE100.

You would have done well to hold onto Games Workshop (LON:GAW) during all the things years, the share price halved in 2022, it was a Falling Star for quite a while and the Stockranking was not very good.

One point QV is the worst performing style after Growth, Contranian has only gone up 17% in 11.5 years, that to me is a loser, inflation is around 72% over 10 years.

The VM figures l believe are incorrect and Stockopedia ignore reports about it.

jburge

Great article and look forward to the follow up.

Alex Naamani

Hi - I can jump in briefly: We pulled the data together programatically (i.e. with python and SQL) but perhaps there is a screen we can share, either in this conversation thread or in another article.

Roland Head

Hi flashing blade,

Thanks for your comments. I'm working on an example screen using some of the metrics discussed in this article. I'll include this with my piece next week.

Roland

Kev

Once again an excellent article Roland. The Stockopedia team are producing some excellent educational material. In your follow up article would it be possible for you to include a section about SELL signals too? That is, can slowing dividend increases or dividend cuts be considered as a profitable exit strategy for multibaggers?

davidallen77

On Games Workshop (LON:GAW) there were chances to buy at 150p in 2008 and £1 in 1998, reading from an old cut out Peter Webb article from IC magazine.

Gary

Thanks Roland for this article. which I feel sure will be of great help to me, not least because of the way you have presented the information in a way that an investor of my relative inexperience can understand. May I add that the entire suite of Stockopedia's learning resources from podcasts to articles like this have made a major difference to my portfolio management. Many thanks to you and the whole team.

Brilliant Leader

It’s a very interesting article Roland and I have spent much of my time over the past decade trying to find screens that will capture this long-term multibagger effect (that process continues to be a work in progress). I have also held Games Workshop (LON:GAW) since 2017 and despite some top slicing along the way (I have an unbreakable rule to top slice at 10% of portfolio value), it remains my largest individual holding.

In the case of Games Workshop (LON:GAW) there was a fundamental shift in the business from 2015 when the current CEO took over. The business moved to being a model of genuine customer centricity and this would not have immediately shown up in screens. It first started hitting my radar in the latter part of 2016. My point is that quantitative factors alone are unlikely to be sufficient and while screening might provide you with shortlist candidates, qualitative research is also critical to understanding a business and why it might be a potential gem.

Cheers
Simon

timarr

It's an interesting article. There are a couple of studies by Schroders on UK multi-baggers that I've quoted a few times (there are suprisingly many of these):

30 baggers over 30 years https://www.schroders.com/en-g...
10 baggers over 10 years https://www.schroders.com/en/g...

Although we can't see the data, and so can't verify it, they identify a number of attributes:

They tend to grow most when they're midcap sized (middle of FTSE250), potentially because they've got big enough to be noticed internationally;
A lot of them come from what we might perceive as fairly boring areas - a lot from the industrials sector;
A lot are technology enablers and adopters;
About a third of the 30 baggers were serial acquirers of other companies - but mainly rolling up smaller businesses, very few large acquisitions;
Crucially they issue very few new shares - over the decades studied the average UK company issued 21% new shares, the 30-baggers issued virtually none;
Their revenue per share grew at 8% a year (over 30 years) or 12% per year (10 years) compared to the average 0.5% - that's all you need to multi-bag, but you've got to keep doing it;
They managed to grow margins as well as revenue, that drives growth;
Dividends were a small component of total return (although that doesn't mean Roland's article isn't accurate - e.g the Games Workshop (LON:GAW) return isn't really predicated on the dividend growth, nice though it's been).

59 companies achieved 30 bagger status over 30 years and 63 achieved 10 bagger status over 10 years.

Jean Roche discussing the background and prospects in December: https://citywire.com/investmen...

Run a screen on the factors suggested above you get a very small pool of companies - Alpha International (LON:ALPH), Ashtead Technology Holdings (LON:AT.), Porvair (LON:PRV), Yu (LON:YU.) Probably as much an issue with the screen as the approach - in particular getting the revenue growth is tricky with the Stockopedia screener.

timarr

Dicky Mint

29th Jan

Great article - thank you.

Clarkson (LON:CKN) is my example of this - my first purchase was in 2002 and I paid £1.94 per share. At the time it was paying circa 15p per share dividend. Over the years I have added to this at various prices and always reinvested dividends.

It closed yesterday at £42.20 per share with a forecast dividend of £1.07 per share. It's not been a one way ride and occasionally the price can be volatile.

I sold a few last year at £40.93 a share to pay off a mortgage and will continue to retain my remaining holding.

Thankfully it's in an ISA :)

Berksbee

Hi Dicky, I too hold CKN over a similar period. Top sliced and bought back on the dips but one of my top holdings. Another share that I think falls into this pond is Tristel (LON:TSTL). as it has a similar div story. Bought in 2002 @ 24p. Looking like its worth a dip at the mo. IMO. A big winner for me. Missed the GAW opportunity and still kick myself every time I read about it!

Robert W

I struggle with EBIT/EV as a measure. Surely if you want to include the debt, you have to include the interest too. I.e. PBT/EV.

jjis

30th Jan

Thanks for the interesting article on the attractions of dividend growth stocks Roland. I have been following a process investing in this type of company for more than 15 years now and I can confirm that it works for me. Interestingly I'd say the hardest part of identifying and owning multi-baggers is the owning / holding on part. Indeed I've owned the likes of Diploma (LON:DPLM), Cerillion (LON:CER) & Games Workshop (LON:GAW) profitably along the way, but got out either by getting worried about valuations or trading fundamentals along the way. So once you think you have identified a quality compounder I guess you just have to remember to hold on through thick and thin to get a multi-bagger. Having said that though I'm sure there are some topical examples like Fevertree Drinks (LON:FEVR) today that wouldn't necessarily have paid off so well if you had held on for the long term, although I never owned that one. So no easy answers on that part I guess, but I'd say it should pay to follow the newsflow and watch out for any changes or deterioration in the business.

I developed my process to identify these type of companies as I found that I was always looking at the same kind of metrics within the stock reports and wanted my own Scoring system for these types of stocks. As I say, it has worked well for me. A graph of the performance of a portfolio based on shares from the top quartile of these Scores is included at the end for reference. This has tended to have a bias toward mid / small and AIM stocks as it is constructed on a roughly equally weighted basis and has been actively managed rather than a buy & hold approach, hence the comments / regrets above.

Interestingly of the stocks mentioned in this thread I am currently holding Clarkson (LON:CKN) too. While the ones flagged by timarr seem to be picked up by reasonably well by the Scores with Alpha International (LON:ALPH) scoring 100, Ashtead Technology Holdings (LON:AT.) scoring 86, Porvair (LON:PRV) scoring 71 and Yu (LON:YU.) scores 94 while the main feature GAW currently scores 77. As discussed above the main hurdle would be buying the right ones and holding onto them for the long run.

I'll leave it there, but if anyone is interested in these Scores and this portfolio, I do offer access to them, you can find further details in my bio.

2nd Feb

Hi Robert,

Thanks for the question on EBIT/EV. I think the idea is that this ratio normalises for different mixes of equity and debt. It allows us to compare operating earnings with a company's total equity and debt capital, so it's easy to get a whole-business view and make comparisons with other companies.

If we subtracted interest from this (i.e. PBT/EV) then the ratio would no longer provide a neutral comparison between companies with different combinations of debt and equity.

Having said that, I would not want to suggest that anyone ignores interest costs. They can have a big impact on distributable earnings and are always something I look at (although I prefer companies without much debt!).

I hope this makes sense!

Jack Torrance

7th Feb

Very thought provoking. If growth stocks tend towards High Flyers over time (last chart), does that mean if you buy High Flyers now, then you’ve missed the boat? Better to focus on Super Stock categories, taking account of the leverage and return ratios mentioned (with the expectation that the share price will increase and they will become High Flyers)?

Why dividend growth could be a multibagger signal

How significant is dividend income?

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Roland Head

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