FTSE 250 incumbent Grafton Group (LSE:GFTU) has seen its shares fall considerably in recent months. Could now be a good time to add the shares to my holdings for a longer-term recovery as well as increased returns? Let’s take a closer look.
Home improvement business
As a quick reminder, Grafton is the largest home improvement retailer in Ireland with over 35 locations. It also has an online store but the business has a diversified offering with distribution and manufacturing arms that provide products in the UK too.
So what’s happening with Grafton shares currently? Well, as I write, they’re trading for 813p. At this time last year, the stock was trading for 1,237p, which is a 34% drop over a 12-month period.
To buy or not to buy
So what are the pros and cons of me buying the shares?
FOR: Investor sentiment for long-term returns around home improvement and building stocks is positive. This is closely linked to the fact that demand for homes is outstripping supply. Government initiatives, as well as private companies, are looking to boost the number of homes being built. Firms like Grafton could experience heightened demand for their products across all its divisions. This could boost performance and returns.
AGAINST: Soaring inflation has led to a spike in the rising cost of raw materials. This has had a material impact on the building trade. With costs rising, profit margins are being squeezed. This could have a detrimental impact on Grafton and its performance. Less profit could mean less to return to shareholders as well as less cash for growth initiatives. The supply chain crisis is also an issue too, which could affect operations and sales. After all, Grafton can’t sell products if it is unable to get hold of them from its suppliers.
FOR: I understand that past performance is not a guarantee of the future. However, looking back, Grafton has a decent track record of consistent revenue and profit generation. Furthermore, at current levels, the shares would boost my passive income stream through dividend payments. Its current yield stands at 3.7%. This is higher than the FTSE 250 average of under 2%. I do understand that dividends are not guaranteed. Finally, the shares have a price-to-earnings ratio of eight, which makes them look good value for money.
AGAINST: Competition in the home improvement and building sector is intense. Many firms are trying to capitalise on favourable market conditions and offer the best prices as well as products. Grafton could see its performance and returns affected if other home improvement businesses are able to win new business more often and dominate the market.
A FTSE 250 stock I would buy
Weighing up the pros and cons, I would buy Grafton shares for my holdings. Based on current market factors, and the race to build lots of new homes, I believe most home improvement businesses will benefit. Grafton is a large name with a diversified business model which helps me make my decision. Furthermore, dividends and its cheap share price help boost my bull case.