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the FTSE 100 index It is still home to many of the UK’s highest earners. However, its medium-sized cousin, W FTSE 250 indexHe still has a number of decent names. One particular share that stands out to me is Dunlam (LSE: DNLM), which has a forward dividend yield of 6.8%.
Furnish good results
After hitting multiple record highs during the pandemic, shares of Dunelm have fallen as much as 50% in the past year. This is because with the cost of living crisis looming, investors were worried that demand would fall catastrophically. Fortunately, those fears were exaggerated, and the FTSE 250 stock has now recovered nearly all of its losses, and is up 80% from its bottom.
In fact, Dunelm shares have continued their bullish momentum this year with an additional 25% gain. This is on the back of a better-than-expected set of half-year results, as the company has practiced “Strict commercial discipline and operational fist”.
| scales | First half 2023 | First half 2022 | growth |
|---|---|---|---|
| he won | 835 million pounds sterling | £796m | 5% |
| gross profit margin | 51% | 53% | -2% |
| profit before tax (PBT) | 117 million pounds sterling | 141 million pounds sterling | -17% |
| free cash flow (FCF) | 102 million pounds sterling | 106 million pounds sterling | -4% |
| Diluted earnings per share (EPS) | 45.8p | 55.4 p | -17% |
Pay dividends
Although not currently a shareholder, it’s always a pleasure to see a FTSE 250 company doing well. This is especially the case after I made several bullish calls last year, citing the retailer’s strong proposition in delivering value during the cost-of-living crisis, all while increasing market share.
However, I unfortunately sold my share at that time as the stock hit my target price. Had I stuck with it, I would have made an impressive 60% gain. However, I plan to reinvest in Dunelm as it continues to sway on all fronts, most lucratively, for its own dividend.
In its semi-annual report, the group declared a special dividend of 40p per share. Given the expectation of 28p for the final dividend later this year, and 16p for the interim dividend for next year, that’s a solid 6.8% return if I were to buy Dunelm shares today.
Cheap stocks?
Aside from its earnings, there are also plenty of other reasons why I’m keen to invest in the retailer. For example, Denelim’s growing market share in household items and furniture shows conviction, as it demonstrates the group’s drive in growing its business efficiently. This is supported by an increasing number of active customers (+5.7%) and higher shopping frequencies (+4.8%).
I’m also a big fan of its strong balance sheet, which boasts a healthy debt-to-equity ratio of 10%. Couple that with its rapidly increasing free cash flow and it’s no wonder Furnished has a special dividend payout. Furthermore, the initial headwinds that plagued the FTSE 250 are now starting to fade. Inflation is beginning to recede, and the Bank of England expects a softer recession.
However, I also have my reservations. The main factor is that both current and future valuation multiples are not exactly the cheapest. As such, it is not surprising to see shares with an average price target of £12.90, which is a minimum of 5% upside from today’s price.
| scales | Dunlam | industry average |
|---|---|---|
| Price-to-sales ratio (P/S) | 1.5 | 0.7 |
| Price-to-Earnings Ratio (P/E) | 16.4 | 11.4 |
| Forward price-to-sales ratio (FP/S) | 1.5 | 0.7 |
| Forward price-to-earnings ratio (FP/E) | 17.2 | 13.9 |
However, I believe these estimates did not take into account a potential recovery in the housing market, which could see higher sales in the medium to long term. The stock is definitely on the lower end of the price range, but I think it’s still fairly valued given its upside potential, free cash flow generation, and strong returns for shareholders, which is why I’d be investing. After all, Warren Buffett once said, “Price is what you pay, value is what you get.”
