Some years ago I was keen to invest in a FTSE 250 business called Victrex (LSE: VCT). Its specialist expertise in polymers used in a variety of mission-critical applications looked to me like a strong competitive advantage. That, I figured, should give the company pricing power.
I did not invest because, although I liked the look of the FTSE 250 business, its share price looked too pricey to me.
Share price woes – or opportunity?
However, the share price later fell to a point where I decided to make a purchase. So far, so good.
The problem, though, was that it kept on falling!
The Victrex share price is now 27% lower than it was just a year ago,
Over five years, it has tumbled 63%. For long-term shareholders who thought they were buying into an attractive business with strong pricing power, that must have been quite a disappointment.
One positive thing to come out of the share price fall, however, has been a growing dividend yield. Currently, Victrex shares yield 8.7%. From a passive income perspective, that potentially makes owning them very lucrative.
The question, though, is whether Victrex will maintain its dividend. After all, dividends are never guaranteed to last at any company.
Pricing problems
The key issue can be seen with a quick look at Victrex’s most recently reported quarter.
Sales volumes grew 8% compared to the same period in the prior year quarter.
That sounds like a strong performance that ought also to help boost revenue and profits. The reality, though, is different. Although the company did not break down profitability for the quarter, it did note that revenue fell 3% year on year.
This is as a result of what is known as the product mix changing. In other words, Victrex sold more product overall, but at a lower price because its pricier products did less well, whereas cheaper products did better. Both within its medical and so-called Sustainable Solutions divisions, Victrex pointed to an “adverse mix” of products.
A long way to go
If it can simply fix the mix, Victrex could likely improve its financial performance – and share price. After all, its sales volumes show strong positive momentum. Indeed, for the nine months until the end of June, they recorded 13% year-on-year growth.
But fixing the product sales mix is not easy. The company is continuing to battle weaker customer demand in its medical division, for example. With medical products able to command a price premium, that is bad news not only for the FTSE 250 firm’s revenues but likely also for its profits.
Victrex has been cutting costs. But it is battling challenges including unfavourable exchange rates and problems ramping up production volumes at its Chinese factory, as well as ongoing weak demand for its medical problems.
Back in May, it held its interim dividend flat. Its £31m of operating cash flow in the first six months of the financial year did not cover the £40m it spent on dividends.
Unless it can improve its free cash flows, I think Victrex will struggle to maintain its dividend at the current level. But a business improvement could help not only the dividend prospects, but also potentially the share price.
I plan to hang onto the FTSE 250 share but will not be buying any more for now.
