A UK stock with a dividend yield above 10% is an increasing rarity. But that’s where Severfield‘s (LSE: SFR) was before the stock pulled back a bit from its recent slump.
In fact, the forecast would have meant a 20% yield as recently as April. But since a 52-week low that month, the share price has more than doubled. It is, however, still 57% below its 52-week high from back in November 2024.
Want a lesson about how short-term volatility can have a dramatic effect on a stock? Look no further. We need to pick apart what’s been happening at the structural steel supplier.
Disappointing update
See those two sharp dips in the share price chart above, last November and at the beginning of March? The first was on first-half results day.
Revenue rose 17% with underlying earnings per share up 14%. The board kept the interim dividend unchanged, and a £10m share buyback was ongoing. All fine so far.
But there’s no disguising the disappointment resulting from a downgraded full-year outlook. CEO Alan Dunsmore told us “the predicted recovery in certain sectors has been slower than previously anticipated, and pricing has remained tighter for longer than expected“. He added that “a number of large project opportunities for FY25 and FY26 have been either delayed or cancelled“.
The official line: “Underlying profits for FY25 are now expected to be below our previous expectations.”
And another one
Then in May, we heard that things were not better, with “project opportunities continuing to be either cancelled or delayed“. Full-year underlying profit before tax guidance was dropped to £18m-£20m. And it got worse, as “underlying profit before tax for FY26 is now expected to be below our revised expectations for FY25“.
With the focus turning to cutting costs and saving cash, the company cancelled its share buyback programme — although it had already come close to the planned £10m.
The 9.5% dividend yield predicted for the current year? Forecasts see a cut next year, with just a 4.3% yield on the cards for fiscal 2026. So that’s the end of the exciting story and I’ve been wasting everyone’s time?
I don’t think so. City analysts seem to agree that the shortfall is indeed a short-term one. And they see Severfield getting back on track with a 6.4% yield marked in for 2027.
Valuation
And what about my headline thing about a potential 43% undervaluation? That’s based on the top end of current brokers’ target prices, currently suggesting 68p. Maybe that’s too optimistic. But the average target of 56.3p could still make the shares look 31% undervalued. And even the bottom end of the range at 41p is still ahead of today’s price.
Those three different prices represent, well, the only three brokers who appear to be offering targets. And that small number of observers raises the risk.
But Severfield’s industry is very much a cyclic one, heavily affected by economic conditions. I fear full-year results could bring further disappointment. But I’m definitely considering this for what I see as its long-term value potential.
