Picture supply: Getty Photos
For years, FTSE 250 polymers specialist Victrex (LSE: VCT) appeared like a stable enterprise — however its share worth was increased than I wished to pay.
That has modified, although. The Victrex share worth has fallen 64% over the previous 5 years. I purchased in alongside the best way, solely to see my holding fall beneath (properly beneath) the value I paid for it.
That falling share worth has, nevertheless, meant that the Victrex dividend yield has risen. It now stands at 9% — properly above the FTSE 250 common.
Such a excessive yield could be a warning sign that the Metropolis is fearful an organization might minimize its dividend. So, what’s happening with Victrex?
A altering enterprise panorama
Victrex used to do very properly as a result of it made a variety of polymers, together with proprietary ones. These have been (and are) utilized in essential functions in planes, automobiles, and the like. So clients have been prepared to pay for high quality. That enabled the corporate to generate surplus money, which it might use to fund the dividend.
However enlargement over latest years, comparable to extending its manufacturing footprint to China, has been a expensive endeavour for the FTSE 250 firm.
In the meantime, a few of its extra worthwhile product strains have seen weakening demand over the previous a number of years.
The results of this may be seen in present enterprise efficiency. In its most just lately reported quarter, the corporate’s gross sales volumes grew 8% 12 months on 12 months. However income truly fell 3%.
How can an organization promote extra but make much less income?
It’s due to what is called the product combine. Extra decrease priced objects and fewer increased priced ones going out the door can have this impact. Victrex has been fighting smooth demand from profitable medical clients.
Time will inform
That’s not its solely problem.
Scaling up manufacturing in China has proved harder that anticipated and the corporate has additionally seen some gross sales sluggish as clients work by way of present inventories. On high of that, Victrex expects change charge fluctuations to knock about £9m from this 12 months’s earnings.
With the chief govt resulting from hand over the reins to his successor on the finish of the 12 months, what is going to occur to the dividend?
On the interim level this 12 months, the payout was held flat. At 13.4p, it was lined by the 17.4p earnings per share.
By way of money movement, although, the £40m price of the dividend considerably exceeded £31m of web money from operations, even earlier than contemplating different outgoings.
I worry the brand new chief govt might determine to chop the payout and see that as a danger. Hopefully, although, they’ll give attention to fixing latest challenges and turning sturdy quantity progress into revenue progress.
With its distinctive know-how, giant shopper base, and business experience, I proceed to love this FTSE 250 enterprise. Whether it is run properly, the present share worth might come to seem like a discount over the long run.
However the dangers are notable. So, though I’ll dangle onto my Victrex shares for now, I don’t plan to purchase any extra regardless of that very tempting 9% yield.
