Shares in Dr Martens (LSE:DOCS) have rallied 17% after the FTSE 250 manufacturer’s trading update. As a result, I’m up on the investment I started making towards the end of last year.
On the face of it though, the report wasn’t good – revenues were down 21% over the last three months of 2023. So is the share price rally a chance to get out as the business struggles?
Why’s the stock going up?
First things first. It’s no secret that a 21% revenue dip isn’t a good thing. So why is the market sending the share price higher?
There are a couple of reasons I can see. One is that the decline was largely due to a weak retail environment, which is an industry-wide issue rather than a company-specific one.
The bigger reason though, is that the drop is in line with what its management had been forecasting. And this probably came as a surprise to investors.
After five profit warnings in six quarters as a public company, investors might justifiably be wary of earnings forecasts from Dr Martens. But this time things were no worse than anticipated.
To some extent, this indicates management is getting a grip on some of the issues the company has been facing since its initial public offering in 2021. And that’s encouraging for investors.
That’s why I think the stock is rallying after what looks like a weak report. Investors had been expecting worse after a seemingly endless parade of bad news.
The selling equation
The recent rally means I’m now up on my investment in Dr Martens shares. So should I cash out while the going’s good? I bought the stock at an average price of around 82p per share. At today’s prices, there’s a return of around 5% if I sell my stake now.
Alternatively, I could keep the shares and earn a return from the dividends the company pays out. Over the last couple of years, this has been 5.84p per share – a 7% annual yield on my investment.
That makes it look like a no-brainer – 7% per year is surely better than a one-off 5% payment. But there are a couple of things to consider that make the equation a bit less obvious.
One is that waiting for dividends is risky. If revenues keep falling, Dr Martens will have to lower its shareholder payments eventually. And it looks like the stock market is expecting this.
The other is that if I took the 5%, I could always reinvest it elsewhere and look for a better return. If I could do this, then selling Dr Martens and buying something else could make a lot of sense.
My plan
All things considered, I’m inclined to stick with my shares. There are a couple of reasons for this.
One is that I think the market is overestimating the chance of a dividend cut. Last year’s share buyback programme should help make the dividend more affordable going forward.
Another is that I can’t find another opportunity I’d much rather own at today’s prices. There are a few that look attractive, but nothing that’s clearly better to me.
That could change. But for now, my inclination is to keep hold of my investment.
The post What on earth is going on with this FTSE 250 stock? appeared first on The Motley Fool UK.
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Stephen Wright has positions in Dr. Martens Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
