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How excessive can a FTSE 250 dividend yield go?
At a time when the index general yields 3.5%, the reply could shock.
A number of FTSE 250 shares at the moment have share yields in double digits, together with photo voltaic funds like Bluefield Photo voltaic Revenue Fund and Foresight Photo voltaic Fund, in addition to a spread of different shares equivalent to Ashmore Group and Renewables Infrastructure Group.
One share comes very near a double-digit yield: Victrex (LSE: VCT). The polymers specialist at the moment yields 9.9%.
Only a few years in the past, although, Victrex’s yield was far decrease – and it has not grown its dividend per share for years. What’s happening?
Challenges aplenty in a altering panorama
The excessive yield regardless of a flat dividend displays a falling share worth.
Over the previous 5 years, the Victrex share worth has tumbled 70%. That compares to a ten% achieve throughout the identical interval for the broader FTSE 250. Ouch.
A number of years in the past, Victrex appeared to be in a robust place. It was sitting on a sizeable money pile and had a confirmed enterprise mannequin centred on its manufacturing of polymers together with patented ones.
The enterprise focus has stayed the identical. However growth plans, together with constructing a manufacturing web site in China, have eaten into the corporate’s stability sheet. Frustratingly, although, demand in some profitable market segments, equivalent to medical, has slowed.
The primary half of this 12 months noticed Victrex report income of £145.9m and earnings per share had been 17.4p.
Within the final equal interval earlier than the pandemic (2019), revenues had been over twice as excessive and earnings per share had been greater than six instances larger.
A internet money place again then had became internet debt of £41m by the tip of this 12 months’s first half.
A high-risk alternative
Which means Victrex has spent a lot of cash to develop its capabilities, however in the meantime its gross sales revenues and income have truly shrunk dramatically as an alternative of rising.
Competitors has elevated and commerce challenges from larger transport prices to tariffs stay a danger to income.
Ongoing softness in demand from high-margin buyer segments stays a danger too. That’s mirrored in the truth that gross sales volumes within the first half grew 16% 12 months on 12 months, however revenues had been up by a much smaller 5%.
Can the FTSE 250 agency flip issues round?
If it may well, the present share worth might turn into a long-term discount. If the dividend is maintained, there might be a really engaging yield as well.
However I see a transparent danger of a dividend reduce down the road. If the corporate can’t enhance its profitability, the share worth might fall additional.
The present price-to-earnings ratio of 18 appears excessive for an organization with Victrex’s inconsistent current monitor report. I imagine it displays investor optimism in regards to the agency’s restoration prospects. That might imply an extra fall if the enterprise’s income don’t enhance markedly.
So even after its huge share worth fall lately, Victrex might but turn into a price entice even now.
I plan to hold onto my shares, however won’t be shopping for any extra within the absence of clearer indicators of enhancing profitability.
