Macroeconomic uncertainties have dominated the UK stock market of late. While some companies, in industries such as oil and mining, have thrived, the majority have suffered in the tough inflationary environment.
This has led to the FTSE 250 falling 14% year-to-date, and over 10% in the past year. But this has also created several bargains, with Dunelm (LSE: DNLM) one of my personal favourites. Should I buy now?
What Dunelm does
The home furnishing company operates 173 stores in the UK. As many consumers focused on home improvement during the lockdowns, the firm managed to post excellent results. Indeed, for FY2021, total sales jumped 26% to £1.3bn.
Further, profits before tax increase 44.6% year-on-year to £157.8m. This stellar performance enabled the company to announce two special dividends, equating in total to 102p per share.
However, the Dunelm share price has sunk since, falling 40% in the past year. This is partly due to the payment of the special dividends. This is because when a dividend is paid, an equivalent amount of cash leaves the company’s balance sheet. Accordingly, a company’s share price will often fall by a very similar amount to the total dividend. In itself, this is not a worrying sign.
However, there are also other factors that must be considered. For example, the FTSE 250 firm is currently struggling with those macroeconomic uncertainties. This includes inflationary pressures resulting from freight and driver shortages, a factor which may strain profit margins.
Dunelm is also experiencing major supply chain disruption, another issue that must be considered. Both are additional reasons for the recent dip in the Dunelm share price.
Ongoing strength
As the pandemic has subsided, there has been an expectation that the demand for home furnishings will also dip. However, there are no clear signs of the firm struggling. For instance, in the first half of the financial year 2022, total sales still managed to see growth of 10.6% year-on-year.
Further, in the same period, the group recorded record profits before tax of £140m, and these are expected to reach around £206m for the financial year. This represents major growth from last year.
The company also remains in very strong financial health, with net cash of £47.7m. This should allow the firm to continue making strong shareholder returns. Indeed, excluding special dividends, Dunelm has a dividend yield of nearly 5%. This is higher than the majority of other FTSE 250 stocks and is also extremely sustainable.
What am I doing with this FTSE 250 stock?
Over the past couple of years, I didn’t buy the stock because I believed that it was simply seeing a pandemic boom. However, the company has continued to deliver growth, and now has a larger customer base than pre-pandemic.
With a forward price-to-earnings ratio of around 10, the Dunelm share price also seems too cheap. Therefore, I’m very tempted to add some Dunelm shares to my portfolio.
