A dividend-paying penny stock I think is too cheap to ignore!

Continued stock market volatility gives investors a chance to buy brilliant stocks at ultra-low prices. This cheap penny stock is one that’s caught my eye.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

I’m not chewing my fingernails over what impact rising interest rates will have on housebulders and on building material suppliers like penny stock Michelmersh Brick Holdings (LSE: MBH).

Latest data showing house prices rising at their fastest pace for 14 years has further assuaged my fears on this front.

However, I am worried about the impact of building product shortages on housing construction. This is something that could have near-term implications for Michelmersh and its peers.

Supply problems

Latest purchasing managers index (PMI) data this week showed a downturn in housebuilding in June. A reading of 49.3 is below the expansionary/contractionary watermark dividing line of 50. And it marked the first slowdown for more than two years.

Also in recent days, housebuilder Persimmon cut its own full-year production forecasts to between 14,500 and 15,000 new homes. It had previously expected volumes to grow between 4% and 7% year-on-year from 2021’s 14,551 delivered units.

Persimmon said that “delays in the planning system, disruption in material supply chains and challenges in securing labour” had impacted construction levels in the first half of 2022.

A dirt-cheap penny stock

This has the potential to damage demand for all building products. This includes Michelmersh, a UK share which City analysts expect to record a 40% rise in annual earnings this year.

That said, I believe recent share price weakness reflects the growing near-term threat to the brickmaker’s bottom line. Michelmersh’s share price has dropped around 30% since the beginning of 2022.

At 91p per share, the company’s forward price-to-earnings (P/E) ratio sits bang on the accepted bargain watermark of 10 times and below.

Strong homes demand

I’d happily buy Michelmersh shares despite this near-term danger. This is because I buy UK shares based on the returns I expect to make over the long haul. It’s why I continue to hold my stake in fellow brickmaker Ibstock.

Once the current problem with raw material shortages passes I expect housebuilding activity to rise strongly again. Indeed, all the country’s major housebuilders have plans to supercharge build rates to make the most of strong market conditions.

I believe property prices will continue to rise solidly during the 2020s. Interest rates are likely to remain well below their historical levels, helping to support strong demand for newbuild properties. Intense competition among Britain’s mortgage providers will also help new homebuyers get onto the ladder, as will new government purchase incentives that are coming down the line.

A top dividend-paying stock

The UK government believes 300,000 new homes have to be built each year to meet this demand. And firms like Michelmersh will play a vital role in enabling housebuilders to create their product.

I think the company’s low share price makes it a bargain right now. And especially as its penny stock status also means it carries a meaty 4.1% forward dividend yield.

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.

Royston Wild has positions in Ibstock and Persimmon. The Motley Fool UK has recommended Ibstock. 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 Investing Articles

Illustration of flames over a black background
Small-Cap Shares

This 13p penny stock’s on fire! Should I buy it?

This UK penny stock has been making investors a lot of money in recent months. Is it worth buying today…

Read more »

Investing Articles

Am I missing out by not buying FTSE bank gem Standard Chartered?

Despite its recent price rise, FTSE 100 bank Standard Chartered still looks very undervalued against its peers and appears set…

Read more »

Mature black couple enjoying shopping together in UK high street
Investing Articles

£10k to invest in an ISA? Here’s how I’d use it to aim for a £97k annual passive income

Harvey Jones reckons he can build a high and rising passive income by investing in a spread of high-yielding FTSE…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

Dividend giant Legal & General’s share price still looks cheap, so should I buy more?

Legal & General’s share price still looks undervalued to me, with the company set for strong growth and continuing to…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

Up 32% this month! Is it finally time to buy this falling FTSE 250 stock?

After years of consistent losses that have slashed the share price in half, this troubled FTSE 250 stock’s making sudden…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Growth Shares

Could the Rolls-Royce share price be above 500p by the year end?

Jon Smith questions whether the Rolls-Royce share price could push higher if upcoming results look good, but balances it out…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

One dirt cheap income stock I’d buy in an ISA today and it’s not Imperial Brands or Vodafone

Harvey Jones is on the hunt for a top FTSE 100 income stock at a low price. He's ruled out…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

£20,000 in savings? Here’s how I’d try to turn it into a £2,987 monthly passive income

Investing in FTSE 100 and FTSE 250 shares can unlock a life-changing passive income over time, as Royston Wild explains.

Read more »