I’d buy this cheap FTSE 100 stock with a dividend yield of 8%

This FTSE 100 stock pays a generous income and is dirt-cheap right now. Here I take a closer look at the company and why I’d buy.

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A house being constructed in the countryside

Image source: Getty Images.

Persimmon (LSE: PSN) is a cheap FTSE 100 stock with an attractive dividend yield of over 8%. The shares are trading on a current price-to-earnings (P/E) ratio of 13x. So I know I wouldn’t be overpaying.

I’d buy the stock right now. The housebuilder released its interim results earlier this week and they were strong. This has strengthened my bullish stance on the company. And as an income-hungry investor, I can’t ignore the generous dividend yield.

The results

The half-year numbers were robust. Against the backdrop of the continuing pandemic, Persimmon managed to deliver £1.8bn in sales compared to £1.2bn in the same period last year. Profit before tax also improved to £480.1m from £292.4m. That’s pretty impressive to me.

What’s also encouraging is that the number of new home completions almost doubled to 7,406 from 4,900. And its new housing operating margin increased from 27.6% to 26.6%. This shows me that even during the coronavirus crisis, the FTSE 100 company has managed to improve its profitability.

Persimmon has also said that it’s “managing the balance of inflationary pressures being experienced by the industry well”. If I’m judging by the numbers alone, it’s pretty clear that it has a good grip on this.

Red flag

But I question how long the builder will be able to bear the brunt of these inflationary pressures. Despite the strong results, rising building costs are a red flag for me.

Currently, Persimmon is absorbing these increasing prices because the housing market in the UK is buoyant. But if this high demand starts to taper off, how will it keep up with the increase in labour and raw material costs? This may result in its profits being hit. It may impact the share price as well.

Outlook

The company has strong forward sales of £2.2bn, which have increased 9% from its last ‘normal’ trading year of 2019. The outlook is also looking rosy as it anticipates that it can deliver approximately 10% growth in sales completions this year. It achieved 13,575 legal completions in 2020 and it reckons it can generate further growth.

The fundamentals of the housing market are still strong. Improving consumer confidence and low interest rates mean that mortgages remain cheap. I don’t expect interest rates to rise anytime soon, so this should help Persimmon meet its target for its financial year.

Should I buy?

The firm has managed to deliver stellar performance and execute its strategy despite the pandemic. It has a strong balance sheet and a good liquidity position, which gives it the financial flexibility if things do get tough.

As I’ve said before, I can’t ignore the 8% dividend yield as an income-hungry investor. Given that things look promising for the builder, I reckon it could afford to continue to pay out the generous income. Of course, there’s no guarantee this will happen.

But I like that the business has an experienced management team, is financially sound and has a strategy that continues to deliver. Hence I’d buy this FTSE 100 stock now.

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 considered so you should consider taking independent financial advice.

Nadia Yaqub 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.

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