The FTSE 100 income star yielding 10.7% I would sell to buy this small-cap

It’s time to give up on this FTSE 100 (INDEXFTSE: UKX) stock and search elsewhere for income, argues Rupert Hargreaves.

| 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.

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’ll admit in the past I’ve recommended home builder Persimmon (LSE: PSN) as one of the best income stocks in the FTSE 100. 

Indeed, at the end of last year, I said that due to the company’s strong balance sheet, “highly profitable” business, and plans to return hundreds of millions of pounds to investors over the next few years, the stock was a better income investment than Royal Mail

However, over the past few months my views have changed. Today, I’m going to explain why Persimmon is now on my ‘sell’ list. 

Time to sell 

Persimmon’s profits have boomed over the past 10 years and, only a few weeks ago, the group became the first homebuilder in the UK to earn more than £1bn in a year. For shareholders this is fantastic news, but the company’s booming profitability is starting to ruffle some feathers. 

The business makes around 50% of its money from the government’s Help to Buy scheme. Last year, the group sold a total of 16,449 new homes, of which 7,970 were to people using the Help to Buy scheme. Overall, the number of dwellings Persimmon sold only increased by 406, but profits surged 13%. The average price of each home sold rose 1% year-on-year. 

Persimmon has been criticised for benefitting excessively from the Help to Buy scheme, and the figures above seem to support this argument. The company is also being attacked for the poor quality of its new builds, treatment of customers, selling homes with onerous leases, and executive pay. 

With all of these issues hanging over the business, some analysts are speculating the group could be stripped of its right to participate in the Help to Buy mortgage scheme, which would decimate profits. 

In reality, I don’t think the government will strip Persimmon of this right — the UK needs every new house it can get right now — so I think money will continue to flow into Persimmon’s bank accounts for the time being.

Still, the company’s outlook is no longer as bright as it once was and. With this being the case, I think it might be best to avoid Persimmon and perhaps invest in one of the UK’s other leading homebuilders if you want to invest in the sector. 

Trash talk

As the UK rushes to build new homes, companies and councils are struggling to expand their services to meet the demand of the new residents, including waste disposal . One company at the forefront of this sector is Biffa (LSE: BIFF). 

I like Biffa as an investment because I think the company is extremely defensive. The world will always produce waste, in ever greater quantities, and its disposal will never stop being a key priority for the government. 

Biffa is building a rubbish conglomerate through acquisitions. Today, it announced a deal to acquire Specialist Waste Recycling Limited for a cash consideration of £25.8m, or around 7.4 times EBITDA. This is a bit on the pricy side, but the deal does make sense overall as it will accelerate Biffa’s expansion in rapidly expanding recycling market. 

Overall, analysts expect Biffa to report earnings growth of 32% for 2019, putting to stock on a forward P/E of 10.7. It also supports a dividend yield of 3.5%. 

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.

Rupert Hargreaves owns no share 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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »