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I’d buy this low-cost stock and its chunky dividends for my ISA right now!

Royston Wild
A person holding onto a fan of twenty pound notes

In recent days, I’ve explained why Ibstock could be about to furnish the market with some upbeat trading details. The UK’s vast homes shortage creates a fertile outlook for the homebuilders, along with providers of essential components like bricks. The ‘Boris Bounce’ that followed December’s general election has boosted the near-term picture for the construction industry too.

Forterra (LSE: FORT) is another share that’s looking good to ride this favourable trading environment. The FTSE 250 brickbuilder was positive-but-restrained in its most recent market update in January. Then it advised that “the challenging market conditions experienced in the second half of 2019 [should] gradually improve.” But it added: “The group’s performance in the first half of 2020 will be below that achieved in the first half of 2019.”

It’s quite possible that, given the bounce to the housing market since the start of the year, Forterra will be a little more upbeat when full-year trading results are unpacked on Tuesday, 10 March. And this could provide its share price with renewed strength.

A bright outlook

City analysts expect the business to record a 4% earnings decline in 2019. However, they reckon Forterra will bounce back with a modest 2% rise this year. An improved 5% increase is forecasted for 2021 as well.

Not only does a robust marketplace, underpinned by a chronic homes shortage and inadequate British brick supplies, look set to support Forterra over the medium-to-long term. The Northamptonshire company can look forward to its new Desford factory coming online too, a move that’ll supercharge brick production in the years ahead.

The production line is set to start rolling at its state-of-the-art facility in 2022, becoming Europe’s largest with an annual capacity of 180m bricks. The move will drive group production capacity around 16% higher and allow the company to capitalise on rising homebuilder activity in the new decade. The government seeks to create 300,000 new homes by the middle of the 2020s.

In my book, Forterra’s low forward P/E ratio of 13.7 times fails to reflect these bright growth prospects.

Above-average dividend yields

Forterra might not be the most exciting income stock and certainly doesn’t offer the biggest dividends yields. Still, yields over the next couple of years outstrip the UK mid-cap average of 3%. For 2020, the reading sits at 3.3% and, for 2021, a yield of 3.5% can be expected.

What makes the business such an appealing income share to me is the likelihood of stronger and sustained dividend growth. Forterra boasts the sort of tremendous cash generation that allows it to light a fire under shareholder rewards.

Cash from operations leapt 15% year-on-year in the first half of 2019, to £27.6m. This helped the amount of net debt on its books to plummet, to £34.5m from £51.9m. And, as a result, Forterra raised the interim dividend by more than a fifth (21.2% to be exact).

The post I’d buy this low-cost stock and its chunky dividends for my ISA right now! appeared first on The Motley Fool UK.

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Royston Wild owns shares in Ibstock. The Motley Fool UK has recommended Ibstock. 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 2020