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

For years, FTSE 250 polymers specialist Victrex (LSE: VCT) seemed like a solid business — but its share price was higher than I wanted to pay.

That has changed, though. The Victrex share price has fallen 64% over the past five years. I bought in along the way, only to see my holding fall below (well below) the price I paid for it.

That falling share price has, however, meant that the Victrex dividend yield has risen. It now stands at 9% — well above the FTSE 250 average.

Such a high yield can be a warning signal that the City is fearful a company may cut its dividend. So, what’s going on with Victrex?

A changing business landscape

Victrex used to do very well because it made a range of polymers, including proprietary ones. These were (and are) used in critical applications in planes, vehicles, and the like. So customers were willing to pay for quality. That enabled the company to generate surplus cash, which it could use to fund the dividend.

But expansion over recent years, such as extending its manufacturing footprint to China, has been a costly endeavour for the FTSE 250 company.

Meanwhile, some of its more profitable product lines have seen weakening demand over the past several years.

The effects of this can be seen in current business performance. In its most recently reported quarter, the company’s sales volumes grew 8% year on year. But revenue actually fell 3%.

How can a company sell more yet make less revenue?

It is because of what is known as the product mix. More lower priced items and fewer higher priced ones going out the door can have this effect. Victrex has been struggling with soft demand from lucrative medical customers.

Time will tell

That is not its only challenge.

Scaling up production in China has proved more difficult that anticipated and the company has also seen some sales slow as customers work through existing inventories. On top of that, Victrex expects exchange rate fluctuations to knock about £9m from this year’s profits.

With the chief executive due to hand over the reins to his successor at the end of the year, what will happen to the dividend?

At the interim point this year, the payout was held flat. At 13.4p, it was covered by the 17.4p earnings per share.

In terms of cash flow, though, the £40m cost of the dividend significantly exceeded £31m of net cash from operations, even before considering other outgoings.

I fear the new chief executive could decide to cut the payout and see that as a risk. Hopefully, though, they will focus on fixing recent challenges and turning strong volume growth into profit growth.

With its unique technology, large client base, and industry expertise, I continue to like this FTSE 250 business. If it is run well, the current share price could come to look like a bargain over the long term.

But the risks are notable. So, although I will hang onto my Victrex shares for now, I do not plan to buy any more despite that very tempting 9% yield.

The post This FTSE 250 share now yields 9%. Can it last? appeared first on The Motley Fool UK.

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C Ruane has positions in Victrex Plc. 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.

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