One FTSE 250 stock I like the look of is Grafton Group (LSE: GFTU). Here’s why I’d be willing to buy some shares for my holdings the next time I have some cash to invest.
Grafton is a distributor, manufacturer, and retailer of building materials. It is the largest business of its kind in Ireland and one of the largest in the UK, as well as having other international operations too. It makes most of its money from distribution.
As I write, Grafton shares are trading for 874p. At this time last year, they were trading for 717p, which is a 21% increase over a 12-month period. For context, the FTSE 250 index is down by less than 1% over the same period.
The investment case
Firstly, I’m buoyed by Grafton’s market position and sector. The building trade, although it faces challenges, has lots of growth opportunities. This is linked to the major shortage of homes as well as soaring demand. I believe this could translate into higher future earnings and potential returns for Grafton, as one of the largest distributors of materials in the UK and Ireland.
Next, Grafton shares look decent value for money to me right now on a price-to-earnings ratio of just 11.
Grafton also has a good record of past performance. Although I understand that past performance is not a guarantee of the future, I can see it has grown revenue and profit for the past three years. More recently, a half-year report released last week, for the six months ending 30 June, was promising. The highlights for me were a revenue increase of 3% compared to the same period last year, and in the face of tough economic conditions. It also confirmed excellent cash generation to supplement its balance sheet. Grafton increased its interim dividend by over 8%, which is pleasing to see.
Finally, Grafton shares would boost my passive income through dividend payments. A dividend yield of 4% is higher than the FTSE 250 average of close to 2%. However, I do understand that dividends are never guaranteed.
From a bear perspective, soaring inflation is something I will keep an eye on. The rising cost of raw materials could mean Grafton’s costs are rising, which could squeeze profit margins. Overall, rising inflation levels could impact performance and investor returns.
Another risk I need to be wary of for Grafton is that of supply chain issues. This could definitely hinder it due to the fact it makes most of its money from distribution. Grafton can’t sell what it can’t get hold of. Supply chain issues have been an issue in the past, especially during the pandemic period. I’ll keep a close eye on developments here.
A FTSE 250 stock I’d buy
Overall, I believe there’s a lot to like about Grafton. Demand for building materials should rise, which could boost its earnings and returns. With its dominant position in some markets, coupled with a housing market crying out for more homes than ever, Grafton could benefit in the years to come.
Grafton’s current valuation and passive income opportunity are also enticing and help me decide to buy some shares when I can.