FTSE 250 companies with robust earnings growth and a high dividend yield are rare. However, last week’s first-quarter trading update from Inchcape (LSE: INCH) shows that the business has both those qualities.
Is it a brilliant bargain to consider snapping up for my diversified stock portfolio? I think it might be.
A suppressed valuation?
The company is a “leading” automotive distributor for vehicles and parts. But a cyclical sector like this might have been unappealing to investors over the past few economically difficult years.
Nonetheless, Inchcape has been trading well for some time. But the stock has moved essentially sideways for half a decade, and the valuation remains undemanding.
With the share price near 786p (25 April), it’s recently sprung up from the lows of last autumn. Part of the move higher was caused by last Thursday’s trading statement.
It covers the three-month period to 31 March, and shows a positive start to the year with “major strategic progress”.
Revenue increased by 5% year on year and that arrived organically and via acquisitions. However, translational currency headwinds offset some of the progress.
Nevertheless, the company experienced momentum in the Asia-Pacific region with “broad-based” organic growth and support from acquisitions.
The directors said an unwinding of the order bank in Europe led to “outperformance”, and key markets in the Americas are stabilising.
Despite operating in a cyclical sector, there’s little sign of stress in the business right now. In fact, it seems to be firing on all cylinders, if you’ll pardon the pun.
Focusing on distribution
One big strategic move is an agreement to sell the UK retail operation for a gain of £346m.
Chief executive Duncan Tait said the deal will complete the firm’s strategic transformation into a pure distribution business, “which is capital light, highly cash generative, higher margin, and globally diversified”.
In other sectors, distributors often do well by serving their industries without becoming embroiled in the cut-and-thrust at the sharp end of dealing with final customers. So I see Inchcape’s new focus as encouraging.
However, the company plans to commence a £100m share buyback programme on completion of the sale. I’m less sure about that because of the £1bn-or-so net debt pile on the balance sheet. When times are good, I like cyclically vulnerable businesses to pay down their borrowings.
Nevertheless, looking ahead, Tait is “confident” about the medium-to-long-term outlook for the enterprise. Meanwhile, City analysts have pencilled in an advance of around 12% for 2025 earnings.
I’m optimistic about the general economic outlook for the coming years. So it may be a good time to consider buying stocks like this one now to hold in a diversified portfolio.
The forward-looking dividend yield for 2025 is around 5%, as I write. That’s potentially a decent income for shareholders while waiting for further improvements in earnings in the years ahead.
