I like to look for value not only in the flagship FTSE 100 index of leading shares, but also in its sister FTSE 250 index of small and medium companies.
One FTSE 250 share I already own offers a dividend yield of 8.1%. That means that if I spend £100 on buying its shares today, I ought hopefully to earn slightly over £8 every year in dividends.
But despite that income appeal, the share has been getting cheaper. It has already fallen 9% this year and we are not even three months in yet! Over five years, the share price has tumbled 41%.
Should you invest £1,000 in Topps Tiles right now?
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Is that a sign that I ought to consider getting ought while I can? Or is this the sort of buying opportunity that forms the stuff of investor dreams?
Strong position in an enduring market
You may well be familiar with the company in question, even if you have not identified it from the description above.
It is Topps Tiles (LSE: TPT), a tile wholesaler and retailer that has been in business for decades already. In recent years it has had a strategic focus of selling one in five of the tiles bought in Britain. The firm has achieved that milestone.
Why do I like this business?
Demand for tiles may go up and down depending on how many people move house and whether disposable incomes are high enough to justify splashing the cash on a new look for a bathroom, kitchen, or utility room.
Over the long term, though, I expect enduring demand for tiles. Topps also sells other surface coverings like vinyl, so the FTSE 250 firm could do well even in the face of changing tastes. Its strong position and deep understanding of the tile market should help Topps stay on top of what customers want.
As well as an extensive network of shops that let DIY fans and builders get what they need without waiting for it, the business has also been steadily expanding its online footprint in recent years for both trade and retail customers.
Valuation concerns
But other investors can see what I see (or more) – and yet have pushed down the price of the FTSE 250 share.
Why?
One reason is concerns about the risks of declining sales. That could result from a weakening housing market or tighter household budgets leading to the deferral of non-essential expenditure. In its most recent quarter, the company’s like-for-like sales fell 7% year on year.
The fixed costs of a business like Topps are high, from shop leases to keeping millions of tiles in stock awaiting buyers. So even a fairly modest seeming slowdown in sales can badly hurt profits. That in turn could lead to the dividend being reduced.
I’d buy
I recognise those risks. I think they help explain why Topps is now in penny share territory.
As a long-term investor, though, I see this FTSE 250 company as having a proven business model based on a strong position in a market I expect to see demand for decades to come
So if I had spare cash to invest today, I would happily buy more of the shares.
