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This dividend stock’s too cheap after crashing 10% today! I’d buy it for my ISA

Royston Wild
Businessman looking at a red arrow crashing through the floor

Investors over at Forterra (LSE: FORT) have been heading for the exits in Tuesday business, leaving ample space for shrewd long-term investors to nip in and grab some action.

The brickbuilder slumped around 10% on Tuesday following a less-than-enthusiastic response to fresh trading numbers (and on top of some profit-booking after recent share price strength).

In the release Forterra said that “while volumes into the new build housing market have remained broadly in line with plan, trading in relation to distributors and non-residential applications has slowed.”

Short-term pain

Brick and block volumes are down in line with the broader market in response to weaker activity, the firm said, while it suggested that further pressure could be expected too. It said that “key indicators such as UK national brick sales volumes, construction output, new housing starts, housing transactions and consumer confidence also point to further uncertainty in macroeconomic conditions.”

Lower sales of its core products aren’t the only problem for Forterra, however. It said that owing to contract delays at its Bison pre-cast concrete division, margins here would likely disappoint in the second half of the year, too.

As a result the small cap said that pre-tax profit for 2019 would likely fall “modestly below” last year’s £64.8m. City analysts had been expecting a figure of around £67.1m.

Forterra’s just one of the many London-listed shares suffering from the political and economic uncertainty that Brexit is wreaking. And as I explained recently, tension over the UK’s future relationship with the European Union is unlikely to go away even if the UK finally exits the continental trading club on 31 October.

Long-term gain!

That’s not to say that I consider this particular share one to be avoided, however. Quite the contrary, in fact. In my opinion, its sub-10 forward price-to-earnings ratio (at 9.9 times), allied with its bumper dividend yields of 4.4% and 4.7% for 2019 and 2020, respectively, make it a terrific buy today.

This bargain-basement valuation provides investors with a cushion should market conditions continue to worsen in the short-term. It’s also worth noting that, despite the company warning that profits will come in below prior forecasts for 2019, those predicted dividends for the next couple of years remain pretty well protected (with earnings covering them by 2 times or more through the period).

Dividend chasers can also take comfort in Forterra’s splendid balance sheet. Today the business confirmed that it “continues to generate strong operating cashflows to support capital investment and the previously announced increased dividend payout.”

Its ability to create shedloads of hard currency meant that Forterra had £32.2m worth of cash and cash equivalents on the books as of June, up 14% from the same point in 2018.

As I say, it’s possible that Forterra will witness some further market turbulence, though in my opinion long-term investors need to grab a slice of the share today. The UK’s desperation for new houses means that the outlook for home construction through the next decade remains compelling.

And when Brexit-related uncertainty resolves itself in the next few years, the weak activity of the moment will be a distant memory as construction activity and thus brick demand comes roaring back.

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Royston Wild 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 2019