With its 9.9% dividend yield, is this FTSE 250 a possible bargain – or value trap?

How high can a FTSE 250 dividend yield go?

At a time when the index overall yields 3.5%, the answer may surprise.

Multiple FTSE 250 shares currently have percentage yields in double digits, including solar funds like Bluefield Solar Income Fund and Foresight Solar Fund, as well as a range of other shares such as Ashmore Group and Renewables Infrastructure Group.

One share comes very close to a double-digit yield: Victrex (LSE: VCT). The polymers specialist currently yields 9.9%.

Just a few years ago, though, Victrex’s yield was far lower – and it has not grown its dividend per share for years. What’s going on?

Challenges aplenty in a changing landscape

The high yield despite a flat dividend reflects a falling share price.

Over the past five years, the Victrex share price has tumbled 70%. That compares to a 10% gain during the same period for the wider FTSE 250. Ouch.

A few years ago, Victrex looked to be in a strong position. It was sitting on a sizeable cash pile and had a proven business model centred on its production of polymers including patented ones.

The business focus has stayed the same. But expansion plans, including building a production site in China, have eaten into the company’s balance sheet. Frustratingly, though, demand in some lucrative market segments, such as medical, has slowed.

The first half of this year saw Victrex report revenue of £145.9m and earnings per share were 17.4p.

In the last equivalent period before the pandemic (2019), revenues were over twice as high and earnings per share were more than six times higher.

A net cash position back then had turned into net debt of £41m by the end of this year’s first half.

A high-risk opportunity

That means Victrex has spent lots of money to grow its capabilities, but meanwhile its sales revenues and profits have actually shrunk dramatically instead of growing.

Competition has increased and trade challenges from higher shipping costs to tariffs remain a risk to profits.

Ongoing softness in demand from high-margin customer segments remains a risk too. That is reflected in the fact that sales volumes in the first half grew 16% year on year, but revenues were up by a far smaller 5%.

Can the FTSE 250 firm turn things around?

If it can, the current share price could turn out to be a long-term bargain. If the dividend is maintained, there could be a very attractive yield to boot.

But I see a clear risk of a dividend cut down the line. If the company cannot improve its profitability, the share price could fall further.

The current price-to-earnings ratio of 18 looks high for a company with Victrex’s inconsistent recent track record. I believe it reflects investor optimism about the firm’s recovery prospects. That could mean a further fall if the business’s profits do not improve markedly.

So even after its big share price fall in recent years, Victrex could yet turn out to be a value trap even now.

I plan to hang onto my shares, but will not be buying any more in the absence of clearer signs of improving profitability.

The post With its 9.9% dividend yield, is this FTSE 250 a possible bargain – or value trap? appeared first on The Motley Fool UK.

More reading

• This FTSE 250 share now yields 9%. Can it last?

C Ruane has positions in Victrex Plc. The Motley Fool UK has recommended Foresight Solar Fund and 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.

See author's posts