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For years there was a FTSE 250 share I used to be eager to put money into, because it had a confirmed enterprise and robust pricing energy. However the share worth was too excessive for my style.
Lastly, the share worth fell and I purchased – solely to see the worth fall even additional.
However the firm maintained its dividend. The falling share worth pushed up the yield.
A optimistic buying and selling assertion this week noticed the share worth soar by virtually a fifth, earlier than giving up a few of these positive aspects. Even after the worth rise although, the dividend continues to be a really enticing 9.1%. Can it final?
Area of interest provider in a horny market
The corporate in query is industrial producer Victrex (LSE: VCT).
It makes a spread of polymers utilized in functions like automotive and aerospace. Because of its proprietary know-how, it has a decades-long historical past of with the ability to promote massive volumes of polymer, typically at a horny revenue margin.
Lately although, the corporate has run into a number of troubles.
Constructing a manufacturing unit in China has proved pricey and, up to now, appears to have supplied little — if any — profit to the enterprise. A slowdown in demand within the profitable medical market additionally harm profitability.
Via all of it, the corporate has maintained its dividend per share at 59.6p for years.
Is the dividend sustainable?
The issue is that, final 12 months, primary earnings per share fell far under that, at 32p. That was really higher than the prior 12 months, however nonetheless fell effectively in need of masking the dividend.
Money flows are essential in relation to masking a dividend.
The corporate’s web money circulate of £72m was larger than the £55m dividend value, however paying the dividend is just not the one value an organization like Victrex has. Its complete investing and financing money outflows weren’t coated by the working money influx.
In the meantime, the corporate – which had been sitting on a sizeable money pile only a few years in the past – reported web debt of £43m as of the tip of final month.
Paying out extra in dividends than a enterprise generates operationally sometimes can not final without end.
Issues in regards to the threat of a dividend minimize, together with lacklustre enterprise efficiency, clarify why the Victrex share worth has fallen 75% in 5 years (and that’s together with this week’s huge soar!)
I’m hanging on to this share!
Present administration has undertaken cost-cutting however up to now has not indicated that it plans to cut back the dividend.
The newest buying and selling replace supplied grounds for optimism in regards to the enterprise outlook. Within the first 9 months of its present monetary 12 months, gross sales volumes and revenues grew strongly: 10% and seven%, respectively.
The latest quarter confirmed an enhancing development, with 17% quantity development and 18% income development. That implies the latest gross sales development has not come on the expense of pricing energy.
Victrex is just not out of the woods but. However the optimistic momentum seems to be robust.
I see the share as undervalued. The danger of a dividend minimize, whereas nonetheless current, seems to be decrease to me than just a few months again. I can be hanging on to my Victrex shares.
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Christopher Ruane owns shares in Victrex.
