If this company is selling at 60% off with a 5% yield, I’m buying it for passive income

Oliver Rodzianko thinks Impax Asset Management could be a very strong investment for him to get passive income. Here are the risks and rewards he’s noted.

| 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.

Silhouette of a bull standing on top of a landscape with the sun setting behind it

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.

I think this company looks like an exceptional opportunity to invest in at the moment for passive income. Not only is the dividend yield good, but the valuation looks incredibly attractive to me.

Here are the main reasons I’m buying it for my portfolio.

Impax

Impax Asset Management (LSE:IPX) is a UK-based investment firm that focuses on environmental markets, particularly in resource efficiency.

It manages funds and accounts that invest in companies that work in renewable energy, water management, waste technology, and sustainable agriculture.

The firm chooses its investments by analysing long-term changes in global trends, and it caters to a range of regions across the world.

Convincing financials

First of all, I think Impax has a lot of stability at the moment, considering its balance sheet has 71% of its assets balanced by equity. This matters to me because the future is often uncertain, and having minimal debts means the firm is well-protected from unexpected challenges.

Also, its revenues have been growing fast. Over the past 10 years, it’s been growing its top-line income by 29% on average every year.

It looks cheap to me, at 68% below its high and selling at a price-to-earnings ratio of 14. Particularly, its valuation, based on my discounted cash flow analysis, shows that it could be 60% undervalued.

I estimated this by projecting earnings per share growth of 20% per year over the next 10 years. That’s conservative, considering it grew its earnings at 37.4% each year on average over the last decade.

Of course, as I was looking for dividends when I found this company, its higher-than-usual yield means I could pocket some nice cash over the next few years if I buy the shares now:

Risks I’ve noticed

However, Impax pays out 78% of its earnings as dividends at the moment. While that’s nice and contributes to its high 5% dividend yield, it means it isn’t reinvesting much of its net income into its funds at this time.

Even if the company decides to maintain this, it’s arguably not sustainable. That’s why I think the yield will go back down to 1%-2% soon, which is the level it was at prior to 2022.

Also, while I noted its excellent revenue growth above, this has slowed down in the past 12 months. That further emphasises that there’s no guarantee the great financial results will continue.

Why I’m buying it

Although there’s a lot I love about this company, I reckon the high dividends are temporary. That means I need other reasons to make an investment in the firm, as the residual income might not last.

Because I want exposure to environmental, social, and governance (ESG) investing, I’ll buy it next time I have some spare cash to invest. It especially seems good to me because the price is so low right now.

The thing is, if I take the dividends out of the equation, it’s still something I’d buy. Why? Because over the past 10 years its grown in price 773%. While past returns are no guarantee of future success, that does give me confidence in a winning track record.

Next time I make more investments, Impax is one company I’m buying a stake in.

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.

Oliver Rodzianko 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 »