The FTSE 100 index hit a new all-time high this year. That does not mean however, that every one of the shares in the blue-chip index has been doing well. Far from it, in fact.
One has more than halved since the beginning of 2024. On paper, that has pushed its dividend based on historical data up to over 9%. But that is indeed only on paper as it has announced plans to suspend the shareholder payout for the foreseeable future.
Clearly, the firm is in trouble. But could this be the sort of recovery play that goes on to do very well?
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Checks, mate
I hope so because I have bought the FTSE 100 share in question: Burberry (LSE: BRBY).
The luxury fashion house, known for its iconic check pattern, has hit some very heavy weather. But it has some advantages that made me willing to invest, compared to some recovery situations.
For a start, it is still making money. Suspending the dividend, although painful for shareholders, ought to enable it to improve its cash flows compared to if it had kept paying out.
As a global brand, with wide distribution and a large audience of past and present customers who may be tempted to buy again, I think there is a lot to like about the business.
Challenging environment
Still, clearly the market has concerns about the business. For a FTSE 100 firm to lose more half of its value in a matter of months is never a reassuring sign.
There has been a sharp slowdown in sales at the luxury end of the fashion market. Burberry has felt this more than most. Its products are expensive enough to feel the heat in a luxury slowdown, without being so exclusive that well-heeled customers just keep on splashing the cash.
A change in management this year could help, but on the other hand it could turn out to be an internal distraction.
Taken together, there is a lot for the business to do. Retail revenues in the most recent quarter plummeted by over a fifth compared to the prior year period. Burberry’s woes are not limited to a specific market as all three of its geographical regions reported a year-on-year sales decline of at least 16%.
Buy and hold
But although there is a lot of work to be done here, I continue to believe that the FTSE 100 business offers me value.
Demand for luxury goods may stay soft depending on how the economy does, but at some point I expect it to rebound. Burberry has multiple strengths that could help it benefit from this, including a unique brand.
Meanwhile, although business performance is weak, the fact that the company remains profitable gives it more room for manoeuvre than if it was struggling to pay the bills.
I think it could be a challenging few years for the company. But as a long-term investor, I remain upbeat about Burberry’s prospects and believe it is worth considering. I think it could turn out to be a brilliant recovery play looking back five years from now.
