Investment company 3i (LSE: III) continues to have a good run at the stock markets. The FTSE 100 share’s price has risen by more than 35% in the past year. And I reckon that it can rise higher, going by its trading update released earlier today.
3i posts positive trading update
The company has said that a “significant majority” of its investments have shown strong performance. It highlights the Dutch retailer Action in particular, which is also its biggest investment. It calls the company’s performance “impressive” in terms of sales, earnings, and cash generation.
What’s next for its share price?
Its share price has not responded much to the update — in fact, it is down by 1.5% as I write. I would not read too much into this, though, because the trend can change before the end of day. And going by past investor reactions to its financial results, I think this is actually a good opportunity to buy.
I had last written about the stock in July, just when it released first-quarter results for its current financial year. In that week alone, 3i’s share price jumped by around 10%. It increased 4% on just the day of the results. And it has not fallen back to its pre-result levels since.
If that is anything to go by, a similar outcome is possible when it releases its detailed half-year financials. Even if the share price does not react quite the same way as it did the last time, it is still a good stock to buy going by the annual price increase seen in the stock. Further, over the past five years, its share price has more than doubled, which shows that it is a performer over the relatively long term.
Dividend payout
A less significant, but also not completely trivial benefit of buying the 3i stock is the dividend payout, I think. It is around 3%, which is lower than the FTSE 100 average of 3.5%. At the same time, it is higher than that of many other growth stocks. Moreover, over the past five years, the yield has been 3.6%. That brings it closer to the average FTSE 100 yield. And if the company continues to perform, it may even increase its dividends.
What can go wrong
However, I think it is essential to recognise that the nature of 3i’s investments can determine its performance. I am particularly cautious of its infrastructure segment at present, in light of China’s Evergrande debacle. Even if there are no real spillovers outside of China, it could signal to investors to be more cautious of investments in the sector.
Also, 3i’s investments in companies like Scandlines, which provides ferries between Germany and Denmark, could continue to suffer as travel has yet to return to its pre-pandemic levels. Further, if the economic recovery stalls, it could impact the valuations for all its investments.
Would I buy the FTSE 100 stock?
However, for now, the recovery is headed in the right direction. And going by 3i’s performance so far, chances are that it will show healthy growth this year too. It is still a buy for me.