There is a temptation to put growth stocks – or what seem to be growth stocks – into an income portfolio. It is obvious why – the portfolio’s performance gets boosted by an entity with more oomph than the cohort it joins. The risk is that the future won’t be like the past; that the rear-view mirror will say little about what’s to come.
So it may be with Victrex (VCT), the speciality chemicals group that makes PEEK, a high-performance plastic used in demanding industrial applications, such as in aero engines or medical implants. For years, demand for PEEK brought Victrex, which was spun out of the chemicals conglomerate ICI in the early 1990s, super-high profit margins and steady but relentless sales growth. Operating margins have averaged 38 per cent in the past 10 years and sales growth compounded at 7 per cent a year from 2010 to 2018.
Since then, sales have spluttered and margins have dropped 10 percentage points below that average. Even so, they remain enviably fat and Victrex’s bosses talk of a good performance in the first nine months of 2021-22, with both sales value and volumes rising 9 per cent on the previous year. Thus they are confident Victrex will make City expectations of earnings of around 94p for the full year, 12 per cent higher than 2020-21. That hardly puts the shares on a low rating but, at below 20 times forecast earnings with the share price at £18.35, it is low compared with its five-year average.
The immediate concern, therefore, is how much progress will slow in 2022-23 since Victrex is tied to growth in global gross domestic product and especially to growth in China, where much of its development is focused. Despite this, its share price seems to have some momentum. It has outperformed the FTSE All-Share index by 6 per cent over the past six months, but is still little more than half its five-year high.
Yet do I dare add to the Bearbull Income Portfolio a stock whose dividend yield won’t quite scrape 3 per cent this year, especially when I have just bought holdings in retailer Pets at Home (PETS) and platinum metals specialist Johnson Matthey (JMAT) (see last week’s Bearbull for a full discussion)?. After all, these two come with yields of 3.2 per cent and 3.5 per cent, respectively, below the fund’s weighted average yield. That was planned, and the fund still has one holding, R&Q Insurance (RQIH), that has axed its payout, meaning that almost £13,000 of capital is producing no income for the time being. Even so, some more thought is needed.
