A year ago, I wrote of FTSE SmallCap structural steel company Severfield (LSE: SFR): “The steel business is highly cyclical and a plunge in earnings, dividends and the share price is normal every so often for this type of company.”
Since then, the coronavirus crisis has happened. I didn’t see it coming, of course, but my earlier comments were general in nature. And reading through today’s full-year report from the company, it’s clear the directors are cautious about the recession ahead.
Why I’m conflicted about this FTSE share
Recessions come and go for different reasons, and the pandemic has accelerated this one. What doesn’t change is how vulnerable out-and-out cyclical firms such as Severfield are to the effects of a general economic downturn.
In fairness, I feel a bit conflicted over this stock. The share price has been recovering well since bottoming in mid-March. And I know the best time to buy a cyclical share is when it has plunged after a long period of robust trading. Indeed, that’s exactly what Severfield has just enjoyed.
For example, today’s figures for the trading year to 31 March show an uplift of just over 19% in revenue year-on-year. And underlying earnings per share rose by almost 15%. And I’m also bullish about the infrastructure sector because I think governments everywhere will try to spend us out of economic trouble. Severfield could be well placed to benefit.
But the directors are expecting a “potentially challenging market ahead,” and they’ve cancelled the full-year dividend. I think that one action speaks volumes about their view of the outlook. So, today’s buoyancy in the share price could be misplaced. And the almost 25% bounce-back the shares have made from the March lows could prove to be overly optimistic. On balance, I’m avoiding the stock.
But here’s my clear winner
Instead, I’d turn to a company operating in a defensive sector. In May, FTSE 250 soft drinks supplier Britvic (LSE: BVIC) issued a decent set of half-year results for the period to 31 March. Revenue and earnings were both up a little compared to the previous year.
However, the directors decided to defer the decision about paying an interim dividend until later in the year because of the crisis. Nevertheless, the company has a long and impressive record when it comes to progressing the shareholder dividend. And once there is more visibility about how Covid-19 is affecting the business, the directors will revisit the issue of a dividend.
Meanwhile, the share price has been recovering well from its March lows. And I can see good reasons for that. Unlike Severfield, Britvic’s business tends to remain stable during periods of economic weakness.
Indeed, people enjoy their branded soft drinks and tend to keep buying them even as orders for Severfield’s structural steel products may dry up in a downturn. And Britvic’s brands such as Robinsons, Drench, Fruit Shoot, R Whites and Purdey’s will likely keep moving through supermarket shelves and other outlets during this recession.
That’s why I’d rather take my investment chances with Britvic than with Severfield right now.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Britvic. 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.