There are a number of stock indexes for the UK market. The FTSE 100 is the most famous one, containing the biggest companies. But the FTSE 250 is a larger collection of companies not yet big enough to break into the FTSE 100. That means that some of them, because of their smaller size, are still in the growth part of their lives.
If I was backing a horse in a race, I’d prefer the young, upcoming runner than the oldest nag in the racecourse. That’s why I find the FTSE 250 can be a rewarding place to hunt for investment ideas. Here is one FTSE 250 share I would pick and hold indefinitely.
These characteristics can make an investment attractive
Consider what sort of company makes for an attractive investment. The answer depends on what one is looking for, but some leading investors like Warren Buffett tend to point to certain characteristics. For example, if a company has a defensive moat which keeps it competitively insulated to some extent, that can help it sustain attractive margins. If it is in a growing market, that can help future revenue growth. It is also attractive if the company has found ways to keep its capital expenditure costs low.
One FTSE 250 member that I reckon matches these criteria is the fantasy games retailer Games Workshop (LSE: GAW).
Its competitive moat is the unique products it sells. For example, the Warhammer range of games and accessories is proprietary to the company. Its market continues to grow, with gamers with more disposable income helping grow markets in Asia as well as Europe. While it does have some capital expenditure costs, such as its own factories and a shop network, the company sells a lot of its products through third-party retailers. That enables it to benefit from sales without having to rely just on building its own retail outlets.
That also gives the company less control over its distribution, though, which could cause problems if retailers decide to switch to other products. 3D printing is one way some gamers create their own physical playing accessories — if that movement grows, it may also reduce demand for Games Workshop’s product lines.
A FTSE 250 share with attractive dividend policy
Games Workshop has already been a stellar FTSE 250 performer in recent years. That could act as a limit on upside potential, as market expectations already seem high. The price-to-earnings ratio is in the forties, which is much higher than I normally like.
To justify that, the company needs to keep growing profits – fast. The amount of time people are forced to spend indoors now could help, as it gives them time and money for fantasy games. But that could change when lockdown ends.
Another attractive thing about Games Workshop is that its simple dividend policy is basically to pay excess cash out to shareholders when it has it. The downside of that is that dividends move about in timing and size. They lack predictability. But the reason I like the policy is that it helps shareholders reap the benefits of the company’s business success. When the FTSE 250 company does well, it pays out dividends. This year, for example, two of the three dividends it has paid out so far are higher than they were the prior year.