Image source: Getty Images
FTSE 250 high-performance polymer manufacturer Victrex (LSE: VCT) paid a 59.56p dividend last year. This generates an 8.4% yield on the current share price of £7.10. By contrast, the average yield of the FTSE 250 is 3.4%, while the FTSE 100’s is 3.6%.
Analysts forecast that the dividend will remain unchanged this year before dropping slightly to 59.3p in 2026. In 2027, it is forecast to rise again — to 60.6p.
Based on the current share price, these payouts would give respective dividend yields of 8.4% this year and next, and 8.5% in 2027.
How much passive income could be made?
The average UK savings amount of £11,000 would buy 1,549 shares in Victrex. At the current 8.4% yield, these would generate £924 in first-year dividends. On the same average yield over 10 years, this would rise to £9,240 and after 30 years to £27,720.
However, utilising the standard investment practice of dividend compounding would vastly increase these returns.
By doing this on the same average 8.5% yield, the dividends would be £14,406, not £9,240, after 10 years. And after 30 years on the same basis, they would rise to £124,520, rather than £27,720!
Including the initial £11,000 investment and the holding would be worth £135,520 by then. And that would give a yearly passive income from dividends of £11,384.
How does the business look?
Earnings growth is what ultimately drives any firm’s share price and dividends.
A risk here for Victrex remains the rollout of China’s Volume-Based Procurement (VBP) programme for medical supplies. In this, the government bulk-buys drugs and equipment via tenders to secure the lowest prices.
The effect of this was evident in its 8 July Q3 trading update. Overall sales volume rose 8% year on year, powered by its Energy & Industrial, and Sustainable Solutions (supporting carbon dioxide reduction) divisions.
However, the average selling prices for its products dropped 11%, driven by its Medical Supplies division. This resulted in a 3% fall in revenue to £71.5m over the period.
Given China’s ongoing VBP initiative, Victrex must increase its volume to drive up earnings from its Medical Supplies division. That said, the firm stated in the update that it is progressing in scaling up its new Chinese manufacturing facility.
As it stands, from now to the end of 2027, analysts forecast an average annual earnings growth rate of 22.3%.
A potential profit on the share price too?
This earnings profile is reflected in the discounted cash flow analysis for Victrex, which is the optimal valuation method, in my view.
It identifies where any firm’s share price should be, based on cash flow forecasts for the underlying business.
The DCF for Victrex shows its shares are undervalued by 54% at their current price of £7.10. Therefore, their fair value is £15.43.
Will I buy the stock?
I believe the firm’s strong earnings growth prospects will drive the share price much higher over time. It will also do the same for its dividends, I think.
I already have a carefully compiled portfolio of high dividend-paying stocks, with which I am happy. However, I have added Victrex to my watchlist should any of these shares underperform for a sustained period.
This story originally appeared on Motley Fool
