Why I’m eyeing this almost 6% dividend yield as the shares shoot up on trading news

This company’s shares could surge If fears of a general economic slowdown fade.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tyman (LSE: TYMN) shares are up around 7% on the release of a trading update. Revenue and adjusted operating profit for the full year will likely be “in line with current market expectations.” And those expectations are for the figures to be above last year’s.

Lately, I’ve become used to stocks falling on the day a company releases trading news, but the market’s reaction to Tyman’s update suggests the outlook is better than investors anticipated.

A progressive dividend

The firm makes engineered door, window and access components to the construction industry serving markets across the world and, as such, operates in a cyclical sector. I reckon we can see evidence of this in recorded earnings, which shows setbacks have occurred in some years. However, the overall trajectory of profits appears to be up, and Tyman hasn’t missed a beat with the shareholder dividend. It’s risen a little each year and is set to come in more than 50% higher than it was five years ago.

But, at first glance, the valuation looks low. Even after today’s move, and with the share price at 221p, the forward-looking earnings multiple for the current year is just over eight and the anticipated dividend yield a juicy-looking 5.6% or so.

It’s possible we could be seeing the beginning of a valuation re-rating upwards. However, the company has a big chunk of debt on the balance sheet. Comparing the Enterprise Value with last year’s operating profit throws up a more realistic multiple of just under 14, so I don’t see the valuation as particularly cheap.

And trading conditions have been “challenging.” The firm reveals in the update that European and UK markets have “weakened” since the half-year report on 25 July, and the North American market is broadly flat “with no clear signs yet of a return to higher activity levels.”

Recovery in the American operations

However, the troubled North American operation, AmesburyTruth, is making progress on resolving its operational issues at the Statesville facility. Tyman’s chief executive, Jo Hallas, said in the update both customer service levels and productivity are showing “an improving trend” in America.

It seems to me that as well as operating in a cyclical sector, Tyman has been growing its enterprise and there’s a consistent record of annual rises in revenue. Indeed, this year’s figures will likely come in better than last year’s because of contributions from acquisitions during 2018 and “the strength of the US dollar against sterling.” 

If the valuation is being depressed because of worries about the economic outlook, we could see the shares resurge if fears of a slow-down fade. Meanwhile, the dividend could keep on coming as it has over the past few years. But if we do see a half-decent plunge in general economic activity around the world, Tyman’s debt could become a problem, especially if earnings and cash inflow plunge.

I like the look of Tyman, its chunky dividend and growth prospects, but I’d like it a lot more if it had lower borrowings. Having said that, perhaps when the outlook is a little uncertain, we can often pick up the best bargains in stocks. Your call!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »