In hopes that it may still catch up, I decided to look for undervalued shares on the mid-cap index.

I found that while the broader market has improved, some dividend stocks still appear surprisingly undervalued. That could present a rare opportunity for income investors seeking to secure strong yields without overpaying.

Two stocks in particular seem too good to be true. But of course, there’s always a catch — so I decided to dig deeper.

Spectris

Spectris (LSE: SXS) is a precision instrumentation and controls company supplying high-tech measurement tools and software to industries including pharmaceuticals, electronics and manufacturing. Its market cap of £3.25bn has increased 13% in the past year and CEO Andrew Heath spent 30 years at Rolls-Royce, bringing deep operational experience to the role.

The firm recently made headlines with its acquisition of Micromeritics Instrument Corporation, a US-based materials characterisation specialist — a move that expands its footprint in the high-margin life sciences sector.

The stock surged an eye-watering 63% in the past month, yet still trades on a not-excessive price-to-earnings (P/E) ratio of 14.2. It also boasts a very low P/E growth (PEG) ratio of 0.22, which suggests strong growth potential, if you ask me.

Income-wise, the dividend yield of 2.5% may not seem exciting at first glance. However, it’s grown at an average rate of 5% for over 20 years, backed by a low payout ratio of only 35%. Financially, the business looks solid, with a low debt-to-equity ratio of 0.53 and a strong net margin of 18%.

The catch? Recent acquisitions sent debt levels soaring in 2024, presenting execution risk if the bets fail to pay off. Also, operating income dipped 32% in 2024, while net income rose 60% — a gap that suggests this year’s results may have been skewed by a one-off capital gain rather than operational performance.

Still, I think it’s a strong stock that’s worth considering. It looks like a quality business offering both growth potential and steadily rising income.

Johnson Matthey

Johnson Matthey (LSE: JMAT) is a speciality chemicals firm focused on sustainable technologies and emission control solutions. The shares are up 21% in the past month, yet the stock remains deeply discounted, with a P/E ratio of just 8.45 and an ultra-low PEG ratio of 0.04.

It offers a healthy dividend yield of 4.56%, supported by a 38% payout ratio. The company has paid dividends for over two decades, although the payout has remained flat for the past three years.

However, the catch on this one is slightly more concerning. Its operating margin is low at 3.2% and Standard Investments, its largest shareholder, has raised concerns about the profitability of the automotive catalyst business. There’s also the risk that losses from the hydrogen technology segment could weigh heavily on future earnings.

So while the valuation looks compelling, the pause in dividends combined with questionable profitability leaves me uncertain. For long-term investors seeking passive income, there are more promising FTSE 250 dividend stocks to consider, I feel.

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I’ve kept half an eye Johnson Matthey since it tumbled out of the FTSE 100 in September 2023. It was hammered by lower platinum prices, a cooling of investor appetite for ESG stocks and mounting costs.

Recovery stock

I flagged it as one to watch in December, when it looked bruised and undervalued, trading on a price-to-earnings ratio of under 10 and yielding 5.5%.

Johnson Matthey has spent the last two years simplifying the business, cutting costs and focusing on what it does best.

While the business was grinding away behind the scenes, pressure ramped up from outside. In January, US activist investor Standard Investments turned up the heat, pushing for a board shake-up and calling for urgent change. Johnson Matthey publicly pushed back, insisting it was on the right path, but the message was clear: the clock was ticking.

The boardroom was refreshed in February, but things didn’t get any easier. In April, the market was rocked by Donald Trump’s tariff threats, which didn’t help.

Then on 22 May, the story changed. The company announced it would sell its Catalyst Technologies division to Honeywell for £1.8bn, generating net proceeds of £1.6bn. Of that, a bumper £1.4bn will be returned to shareholders once the deal completes.

Cleaner and leaner

Alongside the sale, full-year results showed pre-tax profit had nearly tripled to £486m. Management said the business was now focused on Clean Air and PGMS (precious group metal services), with a tighter grip on costs and stronger cash generation, despite “challenging market headwinds”.

Investors liked what they heard. The share price jumped 28% in a single day.

A week later, analysts at Berenberg raised their target price to 1,800p. They said Johnson Matthey had successfully navigated a fork in the road. That’s marginally above today’s 1,776p. So let’s not get too excited.

Berenberg described the company’s new structure as having a “brutally effective” cash-generating focus. And it welcomed the end of strategic confusion between its growth and income priorities.

Still room to grow

Johnson Matthey’s Clean Air division has enjoyed a reprieve, as the net zero backlash slows the switch towards electric vehicles. That gives it a few more years of selling catalytic converters to petrol-based cars. But at some point, the shift towards alternative propulsion systems will come. Shifting its focus to other growth areas like hydrogen technologies brings new risks.

The first leg of any recovery is usually the most dramatic, and Johnson Matthey has delivered on that front. The shares still trade at less than half their 2018 peak, though, which suggests there could be more room to grow.

With a modest price-to-earnings ratio of just 11.7 and a healthy 4.4% trailing yield, the stock still looks like a potential bargain. The company is smaller, tighter and, crucially, back to doing what it knows best.

Investors might consider buying at today’s levels, but should keep in mind that future gains are more likely to come gradually, not in another explosive burst.

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The business has been in divesting mode since the new CEO took charge back in 2022. It had already sold its battery material and medical device components businesses, but this deal dwarfs them. Having long been relegated from the FTSE 100, could a new streamlined business now be primed for a major comeback?

Pressure mounting

The sale of its Catalyst Technologies business comes as something of a surprise to me. In its 2024 annual report it described it as “a core growth driver”. So what changed? The simple answer is: pressure from an activist investor.

Last January, its largest shareholder Standard Investments launched a scathing attack on the board, accusing it of a “continued lack of urgency and incapacity” in arresting its poor share price performance.

The spat eventually went public after the company responded to the claims in an open letter. To me, the business had simply overstretched itself. The process technology it designed and licenced for the energy and chemicals sectors was way outside its core competencies of Platinum Group Metals (PGM) and catalytic converters.

Catalyst Technologies

The sale of Catalyst Technologies is great news for shareholders. It sold it on a cash and debt-free basis at a transaction multiple of 13.3 times earnings before interest tax depreciation and amortisation (EBITDA).

The cash return to shareholders will be considerable at £1.4bn. This equates to 800p per share and represents 88% of the expected net sale proceeds of £1.6bn.

I think the reaction by the market indicates strong approval of the deal. The cutting edge technology is used to create products for transportation fuels, fertilisers, wood products, paints, coatings and polymers. The fact that Honeywell was prepared to pay such a premium highlights the technology’s growth potential. It was simply in the wrong hands to realise that potential.

Streamlined business

After all the divestments, what’s left is PGM and Clean Air. The former is a well-established division with number one positions globally. But it’s Clean Air that really interests me.

A few years ago, its catalytic converters manufacturing hub was seemingly in long-term decline. Not now though. Over the past few years, production of battery electric vehicles has slowed considerably. At the same time, the regulatory environment has softened toward the traditional internal combustion engine (ICE).

The company forecasts that globally an additional 19m light-duty ICE vehicles will now be produced between 2027 and 2034. Each will need cutting-edge catalytic converters. Clean Air sales are expected at more than £2bn in 2027/28, with 90% of that business already won.

At the moment it feels to me that the business has turned a corner. But I’m not in a rush to buy into the stock just yet. I want to do more research. Yet with the share price nearly half what it was back in 2021 (despite the price rise), it could be one for an investor seeking a long-term recovery play to consider.

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Heading into 2025, there are a couple that stand out to me from the UK stock market. And while they could turn out well, there’s just too much risk for me to go anywhere near them with my own money.

Dividend trap

Vodafone (LSE:VOD) has lowered its dividend this year, but there’s still a yield of around 6% on offer. That’s not bad, but I think the unit economics for this business are quite ugly.

The company has around £28.5bn in property, plant, and equipment to maintain. And over the last 12 months, it has generated £3.7bn in operating income using those assets. 

That’s not great and it’s the main reason I’m looking to stay away from the stock. Over the long term, I’m wary that inflation is going to mean the firm struggles to generate a decent return on its investments.

However, Vodafone received a big boost recently with the Competition and Markets Authority approving its proposed merger with Three. This might help improve the equation for investors in the future.

What the company needs to improve its returns is scale. Being able to reach more customers with its installed base of assets should help boost its profitability and the combined business might achieve this. 

Despite this, I’m not interested in buying the stock for my portfolio. Talk of investing another £11bn into the UK’s 5g network before returns appear is enough to keep me firmly on the sidelines.

Value trap

At a price-to-earnings (P/E) ratio of 5, shares in FTSE 250 chemicals company Johnson Matthey (LSE:JMAT) look cheap. But the company is in a tricky position. 

Its largest division is platinum group metals. And the biggest use for platinum is catalytic converters, which feature in internal combustion engines. 

The group has been struggling with global car sales in a cyclical downturn. But the rise of electric vehicles – which seems gradual but inevitable – is potentially a bigger problem over the long term.

Declining businesses aren’t always bad investments. They can sometimes generate significant amounts of cash for shareholders as they wind down this shouldn’t be underestimated.

Earlier this year, Johnson Matthey divested its medical device components unit. And in addition to strengthening its balance sheet, it distributed a substantial amount to investors as dividends.

I’m sceptical of the firm’s ability to repeat this enough to generate a significant return for investors. That’s why I’m staying well away from the stock next year.

Addition by subtraction

Outperforming an index like the FTSE 100 or the FTSE 250 isn’t easy. But one way of trying to do this is by avoiding the stocks that are likely to do worse over time. 

That’s part of my strategy with both Vodafone and Johnson Matthey. As I see it, there are better opportunities elsewhere and that’s where I’ll be focusing my attention in 2025.

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Speciality chemicals company Johnson Matthey (LSE: JMAT) dropped into the FTSE 250 on 18 September last year and has shown little sign of fighting its way back into the blue-chip index. Its shares are down 11.83% over the last year, and 51.54% over five years.

Founded in 1817, many expected Johnson Matthey to benefit from the shift to sustainable technologies. As well as catalytic converters it invests in clean energy projects, including hydrogen fuel, attracting the attentions of ESG (environmental, social and corporate governance) investors.

Can the share price rebound?

The ESG trend became stretched and the sector gave up its gains as higher interest rates drove up borrowing costs. Falling platinum prices hit Johnson Matthey’s headline profitability.

Yet investing is cyclical, and a number of factors that have worked against the group may now be swinging back in its favour.

The obvious one is that its shares are a lot cheaper than they were. Today, they trade at just 9.83 times earnings, alerting bargain hunters like me.

Like many struggling companies, the board has been looking to cut costs. Preliminary results for the year to 31 March showed that its transformation programme delivered around £75m of cost savings, smashing its £55m target. The board has set itself the ambitious target of saving £200m this year, as it simplifies the business.

Johnson Matthey is selling off non-core businesses to focus on the global energy transition through its core precious metals and catalysing technologies operations. It will use some of proceeds to trim net debt, which it cut to £951m in 2025. That’s still relatively high though, given today’s reduced market cap of £2.36bn.

The stock offers an eye-catching trailing yield of 5.56%. The board has a decent track record of maintaining dividends, as this chart shows, pandemic not withstanding.

Chart by TradingView

Yet there’s no getting away from the fact that the high yield is partly down to the underperforming share price.

I think this share still has some way to go

The Johnson Matthews share price took another hit on 27 November, when first-half results showed reported revenues down 14% to £5.6bn, blamed on the “challenging” macroeconomic backdrop. Underlying operating profits fell 4% to £154m.

CEO Liam Condon praised its “resilient performance” and maintained full-year guidance, pinning his hopes on a strong second half. But will he get it?

I’m not convinced. Falling interest rates fall should make funding the net zero transition easier but we may not get them. Inflation could pick up in 2025, as the UK budget drive up business costs president-elect Donald Trump stokes the US economy. Trump’s plan to boost fossil fuels and cut ESG subsidies won’t help.

The 11 analysts offering one-year share price forecasts for the stock have set a median target of 1,762p. If correct, that’s up an impressive 27.15% from today. Of 12 stock ratings, four say a Strong Buy and eight say Hold. None say Sell, which I totally get. Few would want to crystallise their losses at today’s price.

The shares should rebound at some point but I think conditions are too challenging for me to buy it today. I’m watching it though.

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One example is Johnson Matthey (LSE: JMAT), the sustainable technologies and chemicals business with operations based around the use of platinum.

The company has been paying shareholder dividends continuously since at least 1999. Over the past 25 years, the total ordinary annual shareholder payment has risen from 19p per share to 77p per share.

A keen valuation

But can such progress continue? One of the uncertainties is the business makes much of its money from vehicle catalytic converters.

These devices use chemical reactions to reduce the amount of dangerous gases emitted from exhausts. But the tilt towards electric vehicles means the firm’s core business will likely decline.

The share price has been responding to such fears for some time.

That chart looks grim. But the downward trajectory of the stock has made the valuation appealing, and City analysts are optimistic about future profits.

There’s likely to be robust double-digit percentage progress for earnings in the current 12-month trading period to March 2025 and the year following.

One of the strengths of the business is it’s been around for many decades and has a strong research and development operation. The company’s collective knowledge and technologies are relevant to modern applications.  Therefore, the business has the potential to play a big part in a profitable, greener future.

In May with the full-year report, chief executive Liam Condon was upbeat. The firm’s clean air and platinum-group metal (PGM) services generate cash and provide a “strong” platform for newer operations to build on.

Shifting into new markets

The company is developing and growing its catalyst and hydrogen technologies to support and profit from energy transition trends and a net zero future.

Meanwhile, Condon said the slowdown in market penetration of battery electric vehicles means the firm’s clean air business will likely be “stronger for longer”.

City analysts expect the dividend to remain essentially flat this year and next. So they’re not anticipating a major decline in the firm’s cash flows.

What’s needed here is an orderly shift in revenues, earnings and cash flows from catalytic converters towards the upcoming markets and technologies developing for the future. And the company seems to be quietly confident it can move with the times without suffering a downturn in overall business activities.

The change will likely unfold over years, rather than mere months. However, there’s no guarantee the company can maintain its levels of cash flow and shareholder dividends throughout the process.

Positive outcomes are not certain and the stock’s weakness may prove to be justified. That’s perhaps the biggest risk here for shareholders.

Nevertheless, with the share price near 1,640p, the forward-looking price-to-earnings rating for next year is just below seven and the anticipated dividend yield is a little over 4.7%.

To me, that’s a low-looking valuation, and it may help to soften some of the risks if the company can maintain its dividend payments in the coming years. I’d do more research now and think about buying some of the shares to hold for the long term.

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From this list, I’ve narrowed down my selection to just three shares. These are stocks that I already own or would be happy to buy today, if I had fresh cash to invest.

Stronger for longer

Industrial group Bodycote (LSE: BOY) specialises in heat treatment. This process adds strength and corrosion-resistance to metal components, such as those used by aircraft and automotive manufacturers.

There are obviously some cyclical risks to this business. Sales could slow during a major recession. However, Bodycote is a market leader in this sector and has traded successfully through cycles before.

The group’s international footprint and standardised offering appeals to larger customers, and management reported strong demand from aerospace and oil and gas customers last year.

Bodycote’s accounts show attractive double-digit profit margins and the group’s cash generation is generally good, supporting reliable dividend payouts.

The stock currently trades on around 13 times forecast earnings, with a 3.5% dividend yield. I think that could be a good entry point for a long-term investment.

Property recovery

There are lots of ways to play the UK property market, but there are fewer choices for investors who also want to gain exposure to international real estate.

One company that spans almost the whole market is global real estate group Savills (LSE: SVS).

Founded in 1855, Savills has expanded from a London-based agent into an international business serving clients in commercial real estate and high-end residential markets.

Because of its market reach, Savills’ results statements also tend to provide interesting commentary on property market conditions.

In the company’s most recent update, chief executive Mark Ridley said he thought that after a difficult year in 2023, “most markets appear to be past the moment of peak uncertainty”.

Mr Ridley expects to see signs of a broader recovery emerge later this year.

It’s too soon to know if this optimistic view is correct, but the Savills share price is well down from its 2022 highs and looks affordable to me. Broker forecasts suggest a dividend yield of 3.1% for 2024, rising to 3.5% in 2025.

A contrarian choice?

Chemicals group Johnson Matthey (LSE: JMAT) makes most of its profits from catalytic converters for cars, buses and trucks.

This business has fallen out of favour with investors over the last few years, due to concerns about the long-term future of the group’s core clean air business. Some growth projects – such as a planned move into battery technology – have also failed to deliver as hoped.

There are obviously some risks here. But I don’t think demand for catalytic converters will disappear any time soon, especially not for heavy vehicles.

In the meantime, the company is expanding into hydrogen fuel cells – where it has some experience.

Johnson Matthey has been in business for more than 200 years and has adapted to changing technology before. With the stock trading on just 10 times forecast earnings and offering a yield of over 4%, I think the business is starting to look cheap.

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FTSE reject #1: abrdn

Based in Edinburgh, abrdn (LSE: ABDN) was formerly known as Standard Life Aberdeen before losing its vowels.

The global asset manager’s shares were relegated to the FTSE 250 index in August 2022, before returning to the FTSE 100 in December. History has repeated itself, as the group has been rejected from the elite index once again.

At the current share price of 166.1p, abrdn’s market value has dropped below £3.2bn. However, it manages almost £500bn of assets for individual and institutional investors.

What’s more, its 2023 dividend will be 14.6p, matching 2022’s payout. This works out at a juicy dividend yield of 8.8% a year. I don’t own abrdn shares, but that cash payout might be worth me investigating in future.

FTSE flop #2: Hiscox

Provider of niche insurance Hiscox (LSE: HSX) also lost its FTSE 100 status. The Anglo-Bermudan group was in the Footsie for only seven months before a market value under £3.5bn saw it ejected again.

At 1,001p, shares in the Lloyd’s of London underwriter are up 11.5% over one year, but down 40.6% over five years. At the current price, the stock is £2 below its 2023 high of 1,201p on 3 May. However, it is nearly a fifth (+19.7%) above its 52-week low of 836p on 13 October 2022.

Hiscox stock has tumbled since 30 May, largely due to to first-half weakness in its retail unit. I’ve never owned Hiscox shares, but I might take a look at them sometime soon.

Reject #3: Johnson Matthey

Having been founded in 1817, Johnson Matthey (LSE: JMAT) is a 205-year-old speciality chemicals and sustainable technologies company. At the current share price of 1,632.24p, the group is valued at just £3bn, well short of the level needed to remain in the FTSE 100.

At their 52-week high on 3 February, the shares peaked at 2,384p, but then plunged to their 2023 low last Friday (25 August). The maker of catalytic converters is investing in clean-energy projects, including hydrogen fuel, making it popular with ESG (environmental, social, and corporate governance) investors.

Lower platinum group metal (PGM) prices have hit Johnson Matthey’s earnings, but the FTSE firm held its dividend at 77p a share — a dividend yield of 4.7% a year.

FTSE faller #4: Persimmon

Last but not least of the FTSE 100 fallers is UK housebuilder Persimmon (LSE: PSN) — in which my wife owns shares. At the current share price of 1,075p, the group’s market value of £3.4bn means it also misses the cut.

At its 52-week high, this stock peaked at 1,531p on 2 February, before plunging to its 2023 low of 953p on 7 July. The shares have been hammered by falling home sales and house prices, driven down by rising interest rates.

Over one year, this stock is down 27.2% and has crashed by 55.8% over five years. But some investors see Persimmon as a recovery play, given that its stock hovers at March 2013 levels. So perhaps it will return to the FTSE 100 one day?

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In that context, it’s notable that the Johnson Matthey (LSE:JMAT) share price has collapsed to 1,769p as I write. Shares in the speciality chemicals and sustainable technologies company have very rarely traded below 1,800p for the past 13 years — and, when they did, a swift recovery followed.

So, could this be a once-in-a-decade opportunity to take a position in the stock? Here’s my take.

Share price weakness

Johnson Matthey only recently returned to the FTSE 100 index, but any capital inflows from fund managers haven’t helped the company’s performance. The stock’s down 16% in 2023 and 52% on a five-year basis.

Platinum is at the heart of Johnson Matthey’s business. Its core offering centres on platinum refining and manufacturing catalytic convertors to filter car pollutants.

However, longer-term, there are big opportunities from the firm’s research into platinum-based cancer drugs and fuel cells that rely on hydrogen technology.

Falling platinum group metal prices have weighed on the company’s recent performance, contributing to the share price slump. In FY23, underlying operating profit fell 21% to £465m and underlying earnings per share declined 16% to 178.6p.

In particular, the company’s largest division — Clean Air — which sells catalytic converters, is struggling. It experienced the largest fall in operating profit of all the firm’s units, with a 28% decline to £230m. Cost inflation and lower volumes were cited as key factors behind the poor performance.

Overall, if platinum prices remain subdued, there’s a significant risk the share price could fall further.

A platinum price recovery?

One key headwind for platinum group metals has been slow economic growth in China. However, there are a number of factors that point to a potential resurgence. This could be good news for Johnson Matthey’s margins.

South Africa is the world’s largest platinum supplier. Electricity shortages in the country are contributing to constrained production.

In addition, the World Platinum Investment Council expects there will be a 12% increase in demand for the metal from the automotive sector in 2023. Investment demand is growing too.

A combination of constricted supply and rising demand could lead to a price recovery.

Hydrogen

Beyond this, perhaps the most exciting growth area for the business is its hydrogen technologies division. Johnson Matthey aims to cement its position as a leading supplier for innovative firms in this space. This won’t happen overnight. The group anticipates the unit won’t turn a profit until 2026.

Nonetheless, the company’s recent deals to increase green hydrogen production in Norway and China show promise. If Johnson Matthey can successfully reduce its reliance on the car industry by tapping into the hydrogen economy, I think the business could have a stronger, better diversified future.

Should I buy?

There are notable risks facing the shares and a recovery could take a while to materialise. However, I like the company’s long-term strategy, which is characterised by credible ambitions to tap into future growth sectors.

The share price slump looks like it could be a buying opportunity for me. If I had spare cash, I’d buy today.

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This 9% yield looks safe to me

HSBC Holdings (LSE: HSBA) made headlines in the financial press last week when it took over the UK operations of failed US bank SVB Financial (Silicon Valley Bank).

HSBC’s own share price has fallen sharply too as market worries have mounted. However, I think the risk of this £110bn giant suffering any serious problems is minimal.

Indeed, I was reassured by the group’s recent 2022 results. These showed a stable performance and a strong balance sheet. The outlook statement from CEO Noel Quinn also seemed more confident to me than previously.

HSBC’s dependence on China remains a risk, in my view, due to the political situation. But I think the group’s exposure to Asia also provides growth opportunities that aren’t available to UK-only banks.

In particular, I expect HSBC to be a big winner from the reopening of the China this year.

Broker forecasts suggest a dividend of $0.60 per share this year, giving a yield of nearly 9%. That looks safe enough to me. If I didn’t already own enough bank shares, I’d probably buy be buying.

A bargain sin stock

After a strong rally last year, shares in British American Tobacco (LSE: BATS) have reversed sharply. The tobacco group’s share price has fallen by nearly 20% since the end of June last year.

The risks of investing in this business are obvious enough. British American still makes all of its profits from tobacco, as its reduced-harm products are not yet profitable. A long-term decline is a risk, especially in the group’s core US market.

However, sales of vapes and other products are rising fast and are expected to become profitable next year. It’s also worth remembering that the tobacco business has remained bigger and more successful than investors expected 10-20 years ago. I suspect this will continue to be true.

As I write, BATS shares are trading under £30. That prices them on just seven times forecast earnings. With a well-supported dividend yield of 8%, I think this stock looks cheap right now.

A FTSE 100 hydrogen play?

My final choice is industrial group Johnson Matthey (LSE: JMAT). This business is one of the main producers of catalytic converters.

Demand for these expensive exhaust devices might fall as electric vehicle use grows. But Johnson Matthey has been in business for over 200 years and has evolved successfully before.

The company is now using its existing technical expertise to expand into the hydrogen market — a sector where it’s already active.

A failed move into battery manufacturing has left the business with something to prove. Other growth projects could fail too.

However, I think most of this risk is already priced into the stock. Internal combustion engines won’t disappear anytime soon — especially in heavy vehicles such as trucks and buses, where the firm has a big market share.

Johnson Matthey shares currently trade on 10 times forecast earnings, with a 3.9% dividend yield. That looks like good value to me for a long-term investment.

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