I like owning shares in blue-chip FTSE 100 companies that are performing in the economic top league. But I also own smaller FTSE 250 shares. I have been looking for some more of these small- and medium-sized companies to add to my portfolio.
Here is one I have been eyeing. I would happily add it to my portfolio next month if I have spare cash to invest.
Known name, proven operator
The share is Dunelm (LSE: DNLM). The furnishings and homewares retailer is well-known to many householders, as its chain of stores and online presence have helped it build a formidable retail operation.
Doing so has proven to be a formula for success. Last year, the FTSE 250 retailer reported sales of £1.6bn, a 4% increase on the prior year and an all-time record for the company. Meanwhile, profits after tax came in at £152m.
That was lower than the year before, but those earnings still mean Dunelm’s net profit margin last year was 9.3%. In the highly competitive retail industry, I regard that as a solid performance.
Business model has strengths
It points to what I find attractive about the FTSE 250 share as a possible addition to my portfolio.
Demand for homewares is likely to remain high over the long term. Dunelm has a number of competitive advantages that I reckon could help it continue competing effectively in this market. Those include a known brand, large customer base and a range of proprietary products unique to the chain.
But while the company has strengths, there are also some risks for investors. Last month, the company said that, although there are signs the outlook for consumers may be partly easing, “it remains difficult to predict when this might translate into better conditions in our markets”. Tight household budgets continue to pose a risk to both revenues and profits at the company.
Why I’d buy
Still, I like the company’s proven business model and track record of profitability. Past performance is not necessarily an indicator of what will happen in future. But I think that Dunelm has the competitive advantages required to help propel it strongly.
The business is a strong cash generator and that has often translated into juicy dividends. The current dividend yield is 3.9%.
There are quite a few other FTSE 250 companies offering higher yields. But that yield does not include special dividends. Dunelm has been a generous payer of such. Indeed, last year the special dividend of 40p per share almost equalled the ordinary payout of 42p.
With the potential for continued surplus cash generation, I think the outlook for the Dunelm dividend is promising. If I have spare cash to invest in June, I would be happy to add the share to my portfolio.
