For years there was a FTSE 250 share I was keen to invest in, as it had a proven business and strong pricing power. But the share price was too high for my taste.
Finally, the share price fell and I bought – only to see the price fall even further.
But the company maintained its dividend. The falling share price pushed up the yield.
A positive trading statement this week saw the share price jump by almost a fifth, before giving up some of those gains. Even after the price rise though, the dividend is still a very attractive 9.1%. Can it last?
Niche supplier in an attractive market
The company in question is industrial manufacturer Victrex (LSE: VCT).
It makes a range of polymers used in applications like automotive and aerospace. Thanks to its proprietary technology, it has a decades-long history of being able to sell large volumes of polymer, often at an attractive profit margin.
In recent years though, the company has run into multiple troubles.
Building a factory in China has proved costly and, so far, seems to have provided little — if any — benefit to the business. A slowdown in demand in the lucrative medical market also hurt profitability.
Through it all, the company has maintained its dividend per share at 59.6p for years.
Is the dividend sustainable?
The problem is that, last year, basic earnings per share fell far below that, at 32p. That was actually better than the prior year, but still fell well short of covering the dividend.
Cash flows are important when it comes to covering a dividend.
The company’s net cash flow of £72m was higher than the £55m dividend cost, but paying the dividend is not the only cost a company like Victrex has. Its total investing and financing cash outflows were not covered by the operating cash inflow.
Meanwhile, the company – which had been sitting on a sizeable cash pile just a few years ago – reported net debt of £43m as of the end of last month.
Paying out more in dividends than a business generates operationally typically cannot last forever.
Concerns about the risk of a dividend cut, along with lacklustre business performance, explain why the Victrex share price has fallen 75% in five years (and that is including this week’s big jump!)
I’m hanging on to this share!
Current management has undertaken cost-cutting but to date has not indicated that it plans to reduce the dividend.
The latest trading update provided grounds for optimism about the business outlook. In the first nine months of its current financial year, sales volumes and revenues grew strongly: 10% and 7%, respectively.
The most recent quarter showed an improving trend, with 17% volume growth and 18% revenue growth. That suggests the most recent sales growth has not come at the expense of pricing power.
Victrex is not out of the woods yet. But the positive momentum looks strong.
I see the share as undervalued. The risk of a dividend cut, while still present, looks lower to me than a few months back. I will be hanging on to my Victrex shares.
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Christopher Ruane owns shares in Victrex.
