This beaten-down UK stock pays a near-9% dividend yield!
At a dividend yield of 8.75%, Victrex (LSE:VCT) is one of the highest-yielding income stocks on the FTSE 250 today. And a big reason why is that the polymer manufacturing business has encountered troubles of late that sent its share price tumbling by 36% since the start of the year.
A rough patch is perfectly normal for every business. Those with sufficient financial resources and the ability to adapt often end up bouncing back, maintaining shareholder payouts while also delivering impressive recovery returns. So looking at Victrex today, could this be one of these lucrative recovery opportunities?
What happened?
The fall of Victrex’s share price stems from a combination of weaker earnings, margin compression, and operational challenges.
After a lot of internal investment was poured into a new polymer manufacturing facility in China, it finally became operational in late 2024. However since then, production has taken far longer to ramp up than initially anticipated. As such, management cut its full-year production forecast from 100-200 tonnes all the way down to 50 tonnes.
Pairing this disappointing China production warning with ongoing margin pressure from a less favourable product mix, as well as currency headwinds, institutional analysts were quick to downgrade their projections. And unsurprisingly, investors started selling their positions, driving the Victrex share price down, and the dividend yield up.
A hidden opportunity?
Now that the damage is done, and the stockâs trading at a fairly undemanding forward price-to-earnings ratio of 13.9, could now be the right time to consider buying shares?
Zooming out to the industry level shows a steady recovery within the aerospace and electronics sectors. That could serve as a recovery catalyst given that many of Victrex’s customers operate within these industries. And there are some early signs of this happening.
Across the first nine months of its 2025 fiscal year (ending in September), polymer volumes were up by double digits despite the challenges in China. At the same time, managementâs focused on delivering efficiencies to release some pressure on profit margins as it awaits a demand recovery from within the high-margin medical sector.
What does this mean for the dividend yield? Based on the interim results, even after encountering challenges, management remained confident that profits would improve in the second half of its 2025 fiscal year. As such, payouts were maintained.
Since then, investors have received the third quarter trading update, which hinted that profit growth may be a bit slower to arrive than initially expected. As such, underlying pre-tax profits are likely to land at around £46m. But after applying corporation tax, that suggests dividend coverage remains pretty tight, likely requiring dipping into the firm’s cash reserves.
The bottom line
Given the cheap valuation, Victrex presents an interesting opportunity to research for investors comfortable taking on a bit of risk. Cost control efforts are allowing the business to coast through the worst of the cyclical downturn with relative resilience, but it can’t continue like this forever.
Suppose the external sectoral recovery takes longer than expected? In that case, dividends may eventually be put on the chopping block, sending the Victrex share price down even further. And that’s something simply out of management’s control.
Personally, I think it’s more prudent to consider waiting until a more substantial recovery tailwind emerges.
The post This beaten-down UK stock pays a near-9% dividend yield! appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Victrex Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
