Melrose Industries (LSE:MRO) is a FTSE 100 stock that specialises in buying underperforming companies and turning them around. It was the best-performing stock in the index last week, rising over 13%. Over a one-year period, the share price is up 66%. Business is clearly going well. Thanks to its recent performance, a large payout has also been announced. Even though I can’t access this payout, should I buy the stock now for future potential?
How the company operates
The FTSE 100 company has the slogan of “buy, improve, sell”. This sounds simple on paper, as do some of the previous acquisitions. For example, in 2012 it bought a metering company called Elster for $2.3bn (£1.67bn). It turned the business around, increased the value and sold it three years later for £3.3bn.
The usual timeline for turnaround is three to five years, with the main area of focus being engineering and manufacturing businesses. One drag that it had seen recently was with GKN, a business it bought back in 2018. Issues with pension contributions and a general slowdown in demand had pushed Melrose as a whole into a loss of £80m during H1 2020.
However, the stock saw a share price gain last week as its fortunes have reversed. In the half-year results just released, Melrose reported a profit of £109m.
Another point noted in the report was the £729m due to flow back to shareholders. This equates to 15p per share, with the report noting that the “Melrose balance sheet has spare capacity for a significant further capital return next year”.
A positive outlook for the FTSE 100 stock
From a technical point of view, I wouldn’t be buying the stock now in order to get a slice of the £729m payout. The date has already passed on which I would have needed to own Melrose in order to get this payment next week.
What I would be buying shares now for is any future potential payouts associated with businesses within the group. Melrose is seeing improving performance and mentioned in the report that further capital returns are possible next year.
Another positive for the company is the reduction in net debt. After the £729m is paid out, leverage would be at 1.5x, versus 3.4x at the end of H1 2020.
So the thinking here is that the FTSE 100 stock could give me income potential next year and beyond from either conventional dividends or special payouts.
One risk here is that the sector has slim profit margins. The aerospace division reported an operating profit margin of 3.4%. Automotive wasn’t much better either, coming in at 6.2%. This means that only a small increase in costs could reduce profit significantly.
But overall, I think that this FTSE 100 stock has plenty of promise looking forward. I’m considering buying the shares now as an income investor for future payouts and share price growth.
