Every now and then, a penny stock turns up that looks like it’s been through the financial equivalent of a demolition derby — yet still has the engine to get back on the track.
For Severfield (LSE: SFR), that engine is its dividend and a fresh change behind the wheel.
Over the past year, the UK’s largest structural steel specialist has seen its share price crash from 83p to just 34p – a gut-wrenching 58% decline.
The first blow landed in November when interim results failed to inspire confidence. While revenue rose 17%, operating profit swung to a £4.25m loss, compared to an £11.9m profit in the same period a year earlier. Investors were quick to punish the stock.
Things got worse in early March when broker Peel Hunt slashed its price target from 85p to 32p, citing concerns over margins and contract delays. And just when it looked like the pain might be over, July brought fresh US trade tariffs on steel imports. The share price promptly shed another 20%.
The company issued a statement downplaying any material impact from the tariffs — but the damage to investor sentiment was already done.
Dividends in focus
There is however, a silver lining to all this share price carnage. Severfield’s dividend yield’s now hit 10% and for income seekers, that’s enough to turn heads.
But the big question is whether those payouts can be sustained. The company’s currently operating at a loss and generating no operating cash flow. That’s not an ideal recipe for maintaining dividends.
But on the plus side, its balance sheet remains solid. Debt of £79.2m is comfortably supported by £183m of equity, and assets outweigh liabilities by almost two to one. It also boasts a decade-long record of paying dividends, which provides some reassurance.
But unless earnings recover, there’s a risk that those payouts could be scaled back to preserve cash. If so, investors may end up holding nothing more than a declining stock with no income advantage.
Signs of a turnaround?
There was a flicker of optimism last Friday (15 August) when Severfield’s shares closed up 7%. The catalyst? News that the board had appointed Paul McNerney as the new chief executive.
McNerney, who brings experience in both construction and industrial manufacturing, takes the reins at a critical time. With the market-cap down 65.7% year on year, it has slipped firmly into penny stock territory.
A credible turnaround strategy’s now essential to stabilise operations, protect the dividend and restore investor trust.
The verdict
Severfield’s problems aren’t insurmountable, but the challenges are significant. Margins are under pressure, investor confidence is fragile and the macroeconomic backdrop for steel demand remains uncertain.
Still, the combination of a historically strong balance sheet, an established dividend record and fresh leadership could provide the ingredients for a recovery. If McNerney can deliver a convincing roadmap back to profitability, the steel supplier might yet stage an impressive comeback.
For now, it’s one I’ll watch rather than pile into — but for risk-tolerant income investors, the potential gains of that double-digit yield may be worth considering.
