I’d invest £5,100 in this FTSE 100 stock for £200 in annual passive income
Every quarter, FTSE 100 stocks undergo a reshuffle. Depending on their market capitalisations, companies either retain their positions in London’s flagship index or face relegation to the FTSE 250. This can be a useful indicator of which shares are performing well, and which aren’t.
I’ve been eyeing up one company that was promoted to the FTSE 100 in January after a year outside the top division. Due to a healthy 3.94% dividend yield, this stock might be a useful addition to my passive income portfolio.
I’m referring to specialty chemicals business Johnson Matthey (LSE:JMAT). Here’s how I’d invest in the company to target £200 in annual dividend income.
Dividends for passive income
As I write, the Johnson Matthey share price stands at £19.56. That’s a slight increase of 3% compared to where the stock was trading a year ago.
To target £200 a year in passive income, at today’s dividend yield I’d need to buy 260 shares. That would cost me a little under £5,100 — to be exact, £5,085.60.
With that investment, I’d earn £200.37 in annual dividend income.
However, it’s important to remember dividends aren’t guaranteed. Until the pandemic, the company delivered an impressive 32 years of consecutive dividend hikes. That placed Johnson Matthey in the elite club of Dividend Aristocrats.
However, in 2020, the firm rebased its dividend lower, which highlights the risks involved when investing for passive income. That said, the company continued to reward shareholders with distributions, albeit in the form of reduced payouts.
The pandemic presented unique challenges, and I’m optimistic Johnson Matthey can return to strength with another unbroken dividend growth streak in the future.
The company produces emissions catalysts for light and heavy-duty vehicles. It also manufactures catalysts for the chemicals industry and the oil and gas sector. As one of the world’s largest platinum refiners, Johnson Matthey uses platinum-group metals for its industrial products.
There were signs of weakness in the firm’s half-year results to 30 September 2022. Reported revenue fell by 14% in the period, although when precious metals are excluded, this figure actually increased by 10%.
Nonetheless, post-tax profit tumbled 29% to £161m and underlying earnings per share also slumped from 117.1p to 88.2p. Dividends remained static and net debt increased by more than £270m to hit £963m.
Those numbers might make for disappointing reading, but Johnson Matthey is bullish on the future. The company expects to generate at least £4bn in cash from its Clean Air division by 2031 and more than £200m in sales from its budding Hydrogen Technologies arm by 2025.
Couple this with around £1bn in cumulative capital expenditure over the next three years and £150m in annualised cost savings over the same time period, and the case for long-term share price growth has merit.
Should I buy this FTSE 100 stock?
Some numbers in Johnson Matthey’s recent half-year results concern me. However, the positive future guidance is encouraging.
I’m waiting until the company’s full-year results are released on 25 May before making an investment.
I’m hopeful the business will show big improvements across a range of metrics. If it does and I have spare cash available, I’ll buy Johnson Matthey shares for a solid passive income stream.
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Charlie Carman has no position in any of the shares mentioned. 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.