At today’s prices, 6,802 shares in Forterra (LSE:FORT) would cost me around £12,719. I think the stock is a great choice for someone looking to earn a second income.
The brick manufacturer’s stock has been falling as the UK housing market slows down. But for investors with a long-term focus, I think it’s a bargain at today’s prices.
Dividends
Let’s cut straight to the chase. Forterra’s dividend looks pretty enticing right now. The company is set to distribute 10.1p per share to investors in July.
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Right now, Forterra’s shares are priced at £1.87. So a 10.1p dividend means that if I bought the stock today, I’d get around 5.4% of my investment back in the form of a dividend in July.
That’s quite a lot for a short-term payoff. But it’s worth noting this isn’t just a straightforward opportunity to seize some quick cash.
I’m expecting Forterra’s share price to fall after the ex-dividend date in June. After all, it makes sense that investors wouldn’t want to pay as much for the stock without being eligible for the big dividend.
This is why I don’t think buying the stock with a view to selling it after the ex-dividend date and profiting from the payout is a good idea. But as an investor, I have a much longer-term view.
Risk and recession
In aiming to earn a second income I’m looking beyond the next dividend payment. Rather than thinking about the next few months, I’m thinking about the next few years.
Forterra shares currently have a dividend yield of around 8.3%. That’s extremely high, which raises the question of whether or not it’s sustainable – and I don’t think it is.
As a brick manufacturer, I expect the business to make less money in 2023 than it did last year. Rising interest rates are hitting the housing market and building is slowing, leading to less demand for bricks.
I therefore expect the dividend to be lower over the next 12 months and a prolonged recession presents a risk of lower returns over time. But I think this risk is being overstated in the current share price.
Outlook and opportunity
In my view, Forterra has a number of long-term tailwinds behind it. So even if a recession results in low returns in the near future, over time, I think this should be a great source of passive income.
First, the company operates in an industry where demand outstrips supply by some margin. Around 20% of the bricks used in UK housebuilding are imported, rather than manufactured in the UK.
This suggests two things. It implies there might well still be some demand for Forterra’s bricks in a recession and also that the business should be able to maintain strong margins in better times.
Second, the company has been investing in its manufacturing capacity, both in terms of capacity and efficiency. I think this should mean profits can reach new highs on the other side of a recession.
That’s why I’d look to buy 6,802 Forterra shares for a £1,000 second income. I’ve been buying the stock for my portfolio this month and I expect to keep doing so.
