When a stock comes with a dividend yield of 7%+, it can be a sign the business is in trouble. But that’s not the case with brick maker Forterra (LSE:FORT).
In fact, it’s the opposite. The stock has a high yield because the company has just boosted its dividend by almost 50%.
Strong sales
Last week, the company announced the results of its 2022 trading. Overall, these were strong – revenue was up from £370m to £456m and operating income increased from £51m to £70m.
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As a result of the bumper profits, Forterra announced the increase to its dividend. For July 2023 will be just over 10p per share, compared with 6.7p a year ago.
That’s an increase of close to 50%. And with the stock currently trading at £2.10, it takes the dividend yield to just over 7%.
One of the big challenges over the past 12 months has been inflation. Forterra has had to contend with rising costs, both in terms of input materials and energy.
In general, though, the company has handled these very well. It managed to pass on higher input costs by moving from an annual pricing approach to a more flexible model.
Moving forward, Forterra expects its new manufacturing facility to not only increase capacity, but also bring down its costs. This should help with inflation moving forward.
Looking forward
The stock looks cheap at today’s prices. But there are a few things that investors need to keep in mind.
The first is that inflation is still high. As a result, the business is likely to face an ongoing battle to maintain its profit margins – which slipped a little in 2022.
But it’s worth noting that Forterra has already been making moves to offset the rising cost of energy. Management has announced that it’s secured 80% of its energy for 2023.
The second is that the company’s 23% revenue growth is unlikely to be a regular occurrence. Brick manufacturing is a highly cyclical industry and the business had a tailwind behind it in 2022.
With the UK housing market slowing down, this looks set to change in 2023. As a result, Forterra’s management has forecast demand for bricks to fall by 20% this coming year.
A stock to buy
Forterra stock trades at a price-to-earnings (P/E) ratio of around 8. The cyclical nature of the business means that this doesn’t count for much – 2022 was an unusually good year for the company.
Nonetheless, I think that this is a great stock to buy. Over the longer term, the business is well-positioned to exploit a market where demand regularly outstrips supply.
The UK currently has a housing shortage that will take a while to correct. This puts Forterra, as one of the two largest UK brick companies, in a strong position.
Inflation presents a risk that investors will want to keep an eye on in the near term. But at today’s prices, I think Forterra stock looks like a great long-term investment.
