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Is this cheap share the full package?

estate agent welcoming a couple to house viewing
estate agent welcoming a couple to house viewing

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.

The post Is this cheap share the full package? appeared first on The Motley Fool UK.

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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.

Motley Fool UK 2022