A penny stock is a share of a company that is trading for a very low amount: under US$5 or £1.
Steppe Cement (LSE:STCM) is one such.
Background
As the name suggests, Steppe Cement is a cement manufacturer with production based in Kazakhstan.
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Compared to the other names on the London Stock Exchange, it’s relatively small, with a market cap of just over £57m.
Its long history goes back to 1953, when Kazakhstan was still a Soviet state.
What has caught investors’ attention is the sky-high dividend yield of 19% it offers. As an income investor myself, this certainly turned my head when I heard about it.
However, when a yield is so high it’s usually because there’s something wrong with the company.
Risks
In the six months to June 2023, revenue fell by 14% year on year. What is much more concerning is that profit in the same period declined by 99%.
Its dividend was only covered 1.64 times by its earnings in 2022. A massive fall in earnings so far this year, therefore, raises serious questions about its sustainability going forward.
Their yield may be very high, but Steppe Cement shares have also fallen by 28.7% in the last year.
This explains why the yield looks so high right now. It could easily cut its dividend to align more closely to profit. This will lower its yield moving forward.
Therefore, investors looking to invest in Steppe Cement for its dividend may want to reconsider.
Opportunities in the cement industry
Cement is the most widely used substance on Earth after water. It is necessary for much infrastructure in today’s world.
Dams, bridges, roads, and buildings are just some of the stuff it’s used for.
Furthermore, the cement market is expected to grow from 3.86bn tons in 2023 to 5.48bn tons by 2028. This represents a compounded annual growth rate (CAGR) of 7.23%.
Therefore, Steppe Cement is in a good position to grow in this market.
However, it must be noted that the cement industry is responsible for about 8% of planet-warming CO2 emissions.
Even though cement usage is likely to grow for the next few years, we are living in a more environmentally conscious world.
Long-term investors like myself, who have a time horizon of 20-30 years, may want to reconsider if an investment in cement is smart. This is because there may be alternatives to it in that period, as a result of efforts to reduce the magnitude of global warming.
Verdict
Ultimately, I wouldn’t touch Steppe Cement shares.
Firstly, I don’t believe it stands up well as a dividend stock. It has a high yield, but I think there’s a strong chance this will fall. I also like to invest in income shares in stable companies, which Steppe Cement is certainly not.
Secondly, for penny stocks that have a small market cap, I like to see strong growth. Steppe Cements’ declining revenue and profit contradict this. Moreover, even if it were to grow at the same rate as the rest of the cement industry at 7.23% a year, this isn’t enough to compensate for the risk I believe its shares carry.
