With the cost-of-living crisis placing pressure on household budgets, investing in a FTSE 250 home renovator may seem like a strange idea. After all, discretionary spending isn’t exactly at the top of the priority list right now. And with a recession looming, that may not change for quite some time.
But as crazy as it sounds, this may be creating a long-term tailwind for Howden Joinery Group (LSE:HWDN). Let’s take a closer look.
One of the best FTSE 250 stocks to buy now?
With rising interest rates to combat inflation, mortgages are getting more expensive. Households on variable-rate loans are already feeling the pain. And affordability is increasingly dropping for families seeking to buy a new property.
But as a side effect, people are staying put for longer. In the last decade, the average time spent in a purchased property has been steadily dropping. With near-zero interest rates, mortgages were cheap. And as household wealth and home prices increased, families regularly upgraded to larger properties.
Now that house prices are plateauing and inflation is decimating spending power, this behaviour seems to have largely stopped.
As such, with houses being kept longer than initially anticipated, renovation is gaining popularity, even in the current economic climate. That’s terrific news for Howden Joinery, which specialise in designer fitted kitchens, among other products.
Looking at its 2022 results, revenue continued to grow by double-digits versus a year ago. And compared to pre-pandemic levels, sales are ahead by 46%. With profits on the rise, dividends are following suit, increasing by 5.6% to 20.6p per share, reaching a yield of around 3%. To top things off, management has also announced a £50m share buyback, rewarding long-term investors even more.
Needless to say, things seem to be going surprisingly well for this FTSE 250 home renovator business.
Risks may intensify
While sales and profits are still trending up, margins are starting to show signs of weakness. Operating profitability dropped from 19.2% to 17.9% over the last 12 months, due to a 12% hike in expenses. On closer inspection, this increase in capital outflow stems from rising input costs, namely raw materials and energy.
Management has offset this impact through product price hikes. However, this pricing power isn’t as strong as anticipated. Given the current economic conditions, that’s hardly surprising. But margins may get squeezed even further if a recession rears its ugly head.
This pressure may also be amplified by the group’s growing £665.3m pile of lease liabilities which behave similarly to debt. Why? Because they incur interest expenses that are set to rise in line with interest rate hikes by central banks.
But with £308m of cash on the balance sheet, Howden Joinery should have little trouble meeting its financial obligations. And with the long-term demand for kitchen renovations remaining intact, this FTSE 250 business seems to be a lucrative source for dividends and growth today. That’s why I’ve already added it to my portfolio.
