Is this cheap share the full package?

Gabriel McKeown identifies a cheap share in the UK market that appears to be a prime opportunity for his 2023 investment portfolio.

| 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.

estate agent welcoming a couple to house viewing

Image source: Getty Images

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.

When investing, as with many other areas, buying something cheap isn’t always a good idea. I’m always wary of an investment that looks too good to be true and am more than happy to pay a premium for a share if it is of high quality. I am more comfortable taking such a longer-term approach with price stability being more likely via these higher-valued investments.

This is especially the case when looking for strong dividend-payers to add to the income portion of my portfolio. I like to find high-quality companies that have paid consistent dividends for many years. These have robust underlying fundamentals and, consequently, often have a higher price-to-earnings (P/E) ratio. This is due to their long-term returns warranting paying a premium.

Best of both worlds?

However, in pursuit my next investment opportunity, I may have found a company that is the best of both worlds. This is a high-dividend-payer, with strong underlying fundamentals and a very low P/E ratio. The share I am referring to is Vistry Group (LSE: VTY), a UK-based housebuilder.

The company has had a mixed few years, its price falling 30.8% in 2020 before rising 26% in 2021. However, this recovery was short-lived, with the share price down almost 47.5% in 2022. It is also down just shy of 54% from its post-pandemic peak in 2021. So the current valuation is very attractive, with a P/E ratio of 4.8 and forecast to reach just 4.1 in 2023. This is very low, and considerably below the FTSE 350 median of 10.

Impressive dividend and fundamentals

Vistry’s underlying fundamentals are attractive, with low debt levels and strong cash generation. The company has achieved a reasonable earnings generation on invested capital, a core indicator of a stock’s quality. Furthermore, the company currently has a dividend of 9.9%, and this is forecast to hit 12.1% next year. It has paid its dividend consistently for 12 years and can fund this considerable yield comfortably, with a dividend cover ratio of 2.1

Vistry has also grown turnover consistently over the last five years, and despite a tough 2020, underlying earnings have now exceeded pre-pandemic levels. This is undoubtedly encouraging, as a high dividend needs to be accompanied by solid company performance. Another strong signal here is forecast earnings per share (EPS) growth of almost 17%.

Challenging future

However, shares can be cheap for a reason, and the considerable price fall in 2022 should not be ignored. This is likely caused by the current headwinds faced by the housing sector, such as interest rate rises and cost-of-living struggles. And turnover is forecast to grow by only 13.1%, which is considerably below the three-year average of 30.5%, indicating that the next few years could be challenging for the company.

Nonetheless, I think this cheap share presents a great opportunity. The ability to invest in a company with a high yield and underlying solid fundamentals at this price level is very appealing. I will add this share to my portfolio once I have the cash.

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.

Gabriel McKeown 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.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »