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Why I’m tempted by this 5.6% dividend yield

Another article, another plunging share price to report. This time it’s that of fluid power products distributor Flowtech Fluidpower (LSE: FLO), which is down around 10% as I write on the release of the half-year results report.

I reckon the outlook statement did the damage. The company explained that “Brexit-induced nervousness” has been affecting its markets leading to reduced sales activity. Looking ahead, the directors said in the report that there’s little chance of a return to organic growth while the political situation remains unresolved. And they expect the dampener on business activity to persist “well into 2020.”

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Cost savings ahead to boost profits

However, the company doesn’t plan to allow a simple thing such as weaker revenue growth to affect the overall outcome with profits. The directors reckon they can “mitigate” the effect of reduced growth in revenue with cost-reduction measures. Furthermore, they expect cash conversion to continue to improve as working capital falls.

There’s been a comprehensive review of operational resources and productivity and now the management team is developing a plan to “harness the benefits of the many areas of potential improvements identified.” That sounds exciting, but when I read stuff like this in company reports, the cynic in me always wants to ask, “Why did they let things become so inefficient in the first place?”     

The firm is also turning its attention to the supply chain where it sees “major opportunities” to reduce costs, rationalise its range of products and to reduce inventory. Flowtech is clearly serious about this initiative and has created a new role of group commercial director to oversee its execution.

By identifying a way to optimise the medium-term IT strategy without the need to rip it all out and start again, the company has saved a lot of potential expense down the road. And by bearing down on its debt collection and inventory management procedures, the firm is boosting its cash flow performance and points to cash generation in this reporting period as evidence of improvements.

Dividend up

Overall, the half-year figures aren’t bad. Revenue rose 5.7% compared to the equivalent period last year, underlying operating profit moved 7% higher and earnings per share slipped back by almost 11%. But that all-important net cash figure from operations came in at just over £4.4m, which compares to an outflow of cash of around £2.3m last year. Meanwhile, the net debt figure rose to £18.8m up from £18m a year ago.

The directors signalled their confidence in the security of ongoing trading by pushing up the interim dividend by 5% — that doesn’t look like a company on its financial knees to me. Indeed, I’ve been keen on distributors as an investment for a long time because they ride the fortunes of an entire sector without getting bogged down in many of the problems that enterprises face when dealing with end-using customers.

With the share price close to 113p, the forward-looking earnings multiple for 2019 is just over seven and the anticipated dividend yield is 5.6%. I’m not expecting business to entirely fall of a cliff any time soon so see this stock and its valuation as attractive.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.