Is this FTSE 100 stock’s 11.5% yield too good to be true?

Rupert Hargreaves considered if it’s worth buying into this FTSE 100 (INDEXFTSE:UKX) blue-chip income stock.

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After nearly a year of disappointing performances from Galliford Try (LSE: GFRD), shares in the construction group are rallying today after it published an upbeat trading update. 

Only last month, shares in Galliford were under pressure after the FTSE 250 company announced it would shrink its construction division, meaning that annual pre-tax profit for the year to June would range £30m-£40m, lower than analysts’ expectations.

Management decided to take this action after running into issues with two large construction projects, the Queensferry Crossing road bridge in Scotland, and the Aberdeen bypass, both of which have been hit by delays and significant cost overruns.

To try and move on from these problems, Galliford is cutting 350 personnel from its construction business across the UK, hoping to save £15m per annum in the process. This will, according to management’s update, put the group firmly on track to meet its operating profit margin target of 2% by 2020.

Aside from the construction business, the rest of Galliford — mainly homebuilding and regeneration — seems to be operating in line with management’s expectations. 

Moving ahead

So, does this mean it’s now safe to buy back into Galliford and that 12.2% dividend yield? I think it could be worth taking a chance.

Investors have been quick to write off the company over the past 12-24 months as problems have mounted at its construction division. But I’m impressed with how management has handled the situation — raising capital and cutting costs quickly, rather than waiting until it’s too late. It helps that two out of the group’s three primary operating divisions are still generating a healthy level of income for the firm.

With this being the case, I’m cautiously optimistic on Galliford’s outlook. And if the operating performance improves, there could be significant upside for the stock from here. Right now, the shares are trading at a deeply discounted 4.1 times forward earnings, a discount of around 100% to the rest of the UK construction sector.

Undervalued income 

Another undervalued construction group that I think might be worth adding to your portfolio is homebuilder Persimmon (LSE: PSN). Right now, shares in this business are dealing at a forward P/E of 7.2 and yield 11.5%. 

It seems investors are giving the business a wide berth because its reputation is falling apart. Persimmon is frequently accused of selling poor quality homes, and excessive management bonuses have only compounded the firm’s issues. So far, these concerns haven’t dented profitability, however.

The UK still has a chronic housing shortage, and Persimmon, as one of the largest homebuilders in the country, is needed to meet the ever-growing demand. That’s why I think it could be worth adding a few shares in the business to your portfolio.

Demand for the company’s product is still rising, and the current valuation leaves plenty of room for upside potential if sentiment towards the enterprise improves. There’s also that market-beating dividend yield on offer while you wait.

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.

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