This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped spectacularly.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 healthcare stock Smith & Nephew (LSE: SN.) just had a bad week. On Thursday (31 October), it fell a whopping 12.5%.

Is this a great investment opportunity for long-term investors to consider? Let’s take a look.

Lots of potential

I hold Smith & Nephew shares in my own portfolio. Given that the company specialises in hip and knee replacement technology, I’ve always thought that it has bags of long-term investment potential due to the world’s ageing population.

It has been a very frustrating stock to own though. The coronavirus pandemic really hurt the company as many surgical procedures were postponed.

More recently, the company has been impacted by the weak economy in China as well as the country’s Volume-Based Procurement (VBP) programme – a government initiative aimed at lowering the cost of medical products. This has slowed overall growth as the group has significant exposure to the world’s second-largest economy.

Lower full-year guidance

This China exposure is one reason the shares just plummeted.

On Thursday, the company posted an update for Q3 with guidance for the full year. And unfortunately, it was a little disappointing.

As a result of the challenges in China, the company now expects full-year revenue growth of 4.5%. Previously, it was expecting growth of 5%-6%.

Given the lower level of top-line growth, the company expects its profit margins to swell at a slower rate than previously forecast. In August, Smith & Nephew advised that trading profit margin for 2024 would be at least 18%, however, it now expects growth of up to 50 basis points from last year’s figure of 17.5%.

A buying opportunity?

Is there a buying opportunity after the share price crash?

Potentially.

I don’t plan to buy any more shares myself as it’s already a decent-sized position in my portfolio.

But if I didn’t own any of the shares, I might be taking a closer look at the stock now.

Management continues to believe that the company is capable of generating substantial growth and profitability in the long run. “We remain convinced that our transformation to a higher growth company, with the ability to drive operating leverage through to the bottom line, is on the right course,” said CEO Deepak Nath in the Q3 update.

And the stock trades at a relatively attractive valuation today. Currently, the consensus earnings forecast for 2025 is $1.10 (it reports in US dollars). Let’s say that the group actually generates $1 in earnings instead next year. In this scenario, the price-to-earnings (P/E) ratio is only about 12.4 at today’s share price, which is quite low for a healthcare company.

Add in the fact that there’s a 3% dividend yield on offer now, and there’s a lot to like.

Of course, China remains a key risk here in the short term. For the company to do well, it needs the economy to pick up and volume benefits from the VBP programme to come through.

Taking a long-term view, however, I continue to believe this stock has the potential to generate attractive, FTSE-beating returns.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has positions in Smith & Nephew Plc. The Motley Fool UK has recommended Smith & Nephew Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Dividend Shares

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Investing Articles

With 2025 on the horizon, what’s the dividend forecast for Rolls-Royce shares?

As 2024 rolls to an end, our writer considers the forecast for Rolls-Royce shares after the company reinstated dividends earlier…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This FTSE 250 share has surged 20% in a month. Its P/E is still just 3.3. So should I buy?

Our writer thinks this FTSE 250 stock remains enticing, with an ultra-low P/E ratio and an attractive yield. But why's…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Should I buy Aviva for its 7.8% yield now the share price is at 483p?

Despite recent share price volatility, Aviva is still cracking on as a business and pumping out chunky shareholder dividends.

Read more »

Businesswoman calculating finances in an office
Investing Articles

Here’s how I’d use a £20K Stocks and Shares ISA to try and build wealth

Christopher Ruane explains the long-term approach he takes when finding both income and growth shares to buy for his Stocks…

Read more »

Businesswoman calculating finances in an office
Investing Articles

£10,000 to invest? These 2 high-yield shares could deliver a £790 passive income

These high yield shares offer dividend yields more than DOUBLE the FTSE 100 average. Here's why our writer is considering…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

After a solid set of results, is it time to buy this FTSE 100 dividend giant?

I've been looking at FTSE 100 tobacco giant Imperial Brands after it posted impressive full-year results yesterday.

Read more »

Investing Articles

It’s big! It’s yellow! But is this FTSE 250 stock a safe place to store my capital?

After viewing its half-year trading update yesterday, this FTSE 250 storage giant left our writer considering whether to invest in…

Read more »