On 23 September, the deputy chairman of Dunelm Group (LSE:DNLM), the FTSE 250 home furnishings retailer, and his wife sold stock in the company worth £114m (4.9%). Due to the large number of shares involved, Sir Will Adderley had to offload them at 1,140p each — a discount of 7.7% to the prevailing market price.
Although the family still retains a 32.8% interest, in my opinion, selling such a large slice of the company sends out the wrong message. In fact, it goes against the advice of two brokers who, in September, issued guidance notes to their clients suggesting they buy the stock. Berenberg and Canaccord Genuity have set a target price of 1,470p and 1,325p, respectively.
According to the company, Sir Will “remains fully committed” and undertook the sale to achieve greater portfolio diversification. This is a sensible investing strategy. However, it does illustrate a problem that large shareholders have — it’s never easy knowing when to convert shares into cash. Their motives will be scrutinised and investors might draw the wrong conclusions.
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So I’m going to ignore this recent transaction, and the advice of the two brokers, and form my own opinion as to whether Dunelm would make a good investment for me.
Growth prospects
Although sales have grown 7.9% over the past three years, this hasn’t fed through to the company’s bottom line. Diluted earnings per share (EPS) were 11% lower in FY24, compared to FY22.
The directors hope to reverse this by increasing the group’s UK market share from 7.7% to 10%. If we move into a lower interest rate environment (as anticipated) this could help improve consumer sentiment and boost disposable incomes.
Analysts appear to have confidence that this target will be met and are predicting steady earnings growth. The consensus forecast is for EPS of 77.9p (FY25), 82.6p (FY26) and 87.2p (FY27). This implies a sensible forward (FY27) price-to-earnings ratio of 13.4.
Now could be a good entry point for me.
Passive income
However, forecasting the income that might be earned from the group is difficult.
Over the past four years, it’s steadily increased its interim and final dividends. However, it also makes a special payment which varies widely. For example, in FY21, it declared 65p a share. In FY24, it paid 35p. This helps illustrate that dividends are never guaranteed, special dividends even less so.
But if we look at the payments over the past 12 months, the shares are currently (8 October) yielding a very impressive 6.6%.
Reasons to be cautious
There are risks. It might take a while for investor confidence to return after the Adderleys’ sale. This could hold the share price back in the short term.
And operating physical stores is challenging. Online retailers have the advantage of not having to pay business rates.
Also, the UK economy’s struggling to grow at the moment. Worse, the government’s sounding particularly downbeat about the state of the nation’s finances, which I fear is supressing consumer optimism.
What should I do?
Against a challenging backdrop, Dunelm Group has delivered strong share price growth in recent years and currently offers one of the most generous dividends on the FTSE 250.
I’m therefore going to keep the stock on my watchlist for when I’m next in a position to invest.
