Any income stock offering an above-average yield always grabs my attention. This is particularly true for one company in the FTSE 250 right now.
The question, however, is whether its dividend stream is sufficient to outweigh the risks involved.
Fallen star
Victrex (LSE: VCT) might not be on the tip of most retail investors’ tongues today. However, there was a time when the producer of high-performance PEEK polymers was extremely popular. Five years ago, the stock was changing hands for over 2,600p a pop.
Since then, however, it’s been an absolute dog for holders, falling no less than 73% in value (at the time of writing this on 17 July).
Reasons for this cataclysmic collapse include a fall in demand from several of the firm’s key customers in the automotive and industrial sectors, partly in response to ongoing economic uncertainty. Elsewhere, the higher-margin Medical division isn’t delivering the growth that had been hoped for. Operational problems persist at its factory in China as well.
Have we seen the bottom?
Despite such a poor run of form, there are signs that things might just be stabilising.
This month’s trading statement revealed that group revenues were up 18% in Q3. As a result, management elected to maintain its previous full-year guidance. Underlying pre-tax profit should come in somewhere in the range of £42m to £44m.
While this news is unlikely to have popped many champagne corks, Victrex shares are up 14% in the last month, easily outpacing the FTSE 250.
And then there’s the dividends. Right now, the forecast yield stands at a chunky 8%. By contrast, the index yields ‘just’ 3.1%. So, it might be argued that new investors would be compensated well for taking on the risk of holding the stock.
Looking under the bonnet
Even so, it’s important to bear a couple of things in mind.
First, the total dividend hasn’t increased for several years now. That’s not really a surprise considering the downturn in trading. However, I tend to regard this as a pretty significant red flag when it comes to looking for ways of generating passive income from the stock market. It’s not just that a stagnant dividend points to a business treading water; it means that shareholders are more exposed to the eroding effects of inflation.
On a related note, Victrex’s payouts haven’t been covered by profit since 2023. Clearly, this can’t go on indefinitely. Without a sizeable reversal in trading, I wouldn’t be surprised if dividends were eventually slashed.
My verdict on this income stock
For those with strong stomachs and long time horizons, I can see the attraction of Victrex shares. New(ish) CEO James Routh’s plan to restructure the business by simplifying its portfolio and cutting headcount seems sensible. Throw in a fairly robust balance sheet and a recovery in the share price is not beyond the realms of possibility.
But the issues highlighted above, coupled with more competition and the possibility of higher costs, lead me to think the road ahead will be long and tough.
If income is the goal, the precarious state of Victrex’s dividends suggests there are far better opportunities to think about elsewhere.
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Paul Summers has no position in any of the shares mentioned
