James Latham's dividend is appealing

James Latham's (LTHM) volatile results in the past few years are indicative of wider geopolitical uncertainty. The panel and timber distributor's revenue growth, profit margins and cash generation have been swinging up and down as it has been trying to deal with continued disruption to its supply chains.

In 2022, revenue and profit shot up after EU sanctions on Russia pushed up timber prices. Prices are now coming down, at the same time as economic conditions are pushing consumers to trade down to cheaper lower-margin products, posing a threat to group margins.

Management said that, while many customers have strong order books, the merchant marketplace has been struggling. On top of this, attacks in the Red Sea are increasing freight costs, which impacts around 25 per cent of its products. Correspondingly, gross margin dropped from 19.6 per cent to 16.9 per cent, a little below the long-term average.

However, the exceptionally strong performance in the past few years means James Latham has been able to build up a big cash balance. Net cash is a healthy £67mn, which means that, despite the revenue slowdown, management has been able to offer a special dividend of 45p, on top of an already generous final dividend. 

The company may be at the whim of the wider economic and geopolitical situation, but it is pretty good at turning the sales that come its way into cash returns for shareholders. It operates within a cyclical corner of the economy and its fortunes are linked to the trajectory of mortgage rates and their impact on new housing development. The forward consensus rating, at 13 times forecast earnings per share, has been creeping up, suggesting that the market believes that mortgage rates may have peaked. So, with the headline dividend yield (including the special payment) bobbing around 6.5 per per cent, we switch to a buy. 

Last IC View: Hold, 1,050p, 30 Nov 2023