Barring a minor dip last week, FTSE shares in general have enjoyed a strong first half to the year. But while the FTSE 100 is up almost 7%, the FTSE 250 is lagging, at only 2.5%.
In hopes that it may still catch up, I decided to look for undervalued shares on the mid-cap index.
I found that while the broader market has improved, some dividend stocks still appear surprisingly undervalued. That could present a rare opportunity for income investors seeking to secure strong yields without overpaying.
Two stocks in particular seem too good to be true. But of course, there’s always a catch — so I decided to dig deeper.
Spectris
Spectris (LSE: SXS) is a precision instrumentation and controls company supplying high-tech measurement tools and software to industries including pharmaceuticals, electronics and manufacturing. Its market cap of £3.25bn has increased 13% in the past year and CEO Andrew Heath spent 30 years at Rolls-Royce, bringing deep operational experience to the role.
The firm recently made headlines with its acquisition of Micromeritics Instrument Corporation, a US-based materials characterisation specialist — a move that expands its footprint in the high-margin life sciences sector.
The stock surged an eye-watering 63% in the past month, yet still trades on a not-excessive price-to-earnings (P/E) ratio of 14.2. It also boasts a very low P/E growth (PEG) ratio of 0.22, which suggests strong growth potential, if you ask me.
Income-wise, the dividend yield of 2.5% may not seem exciting at first glance. However, it’s grown at an average rate of 5% for over 20 years, backed by a low payout ratio of only 35%. Financially, the business looks solid, with a low debt-to-equity ratio of 0.53 and a strong net margin of 18%.
The catch? Recent acquisitions sent debt levels soaring in 2024, presenting execution risk if the bets fail to pay off. Also, operating income dipped 32% in 2024, while net income rose 60% — a gap that suggests this year’s results may have been skewed by a one-off capital gain rather than operational performance.
Still, I think it’s a strong stock that’s worth considering. It looks like a quality business offering both growth potential and steadily rising income.
Johnson Matthey
Johnson Matthey (LSE: JMAT) is a speciality chemicals firm focused on sustainable technologies and emission control solutions. The shares are up 21% in the past month, yet the stock remains deeply discounted, with a P/E ratio of just 8.45 and an ultra-low PEG ratio of 0.04.
It offers a healthy dividend yield of 4.56%, supported by a 38% payout ratio. The company has paid dividends for over two decades, although the payout has remained flat for the past three years.
However, the catch on this one is slightly more concerning. Its operating margin is low at 3.2% and Standard Investments, its largest shareholder, has raised concerns about the profitability of the automotive catalyst business. There’s also the risk that losses from the hydrogen technology segment could weigh heavily on future earnings.
So while the valuation looks compelling, the pause in dividends combined with questionable profitability leaves me uncertain. For long-term investors seeking passive income, there are more promising FTSE 250 dividend stocks to consider, I feel.
