What is not to like about a FTSE 100 stock that is also dirt-cheap and has a massive dividend yield? A fair bit, it appears. The stock in question is the Russian miner and steel manufacturer Evraz (LSE: EVR). For any investor who likes good dividends, it needs no introduction.
Evraz has an eye-popping dividend yield
The stock has the biggest dividend yield among FTSE 100 stocks right now, a huge 15.5%. And as per recent AJ Bell research, it will continue to reward investors with the high dividend yields even during 2022. Slated to be at an even higher 17.2%, it is followed by BHP at a significant distance, with an expected yield of 10.6%.
Moreover, it has a really low price-to-earnings (P/E) ratio of 7.7 times, compared to 18 times for the FTSE 100 index as a whole. This suggests that its share price could rise over time. That is, unless investors are on to something, and have priced in a correction.
What could go wrong with the FTSE 100 stock
I suspect that could be the case, considering that prices of industrial metals are forecast to be lower this year compared to last. This is likely to impact their earnings. Besides this, higher taxes on metal companies in Russia could also prove to be a drag on them.
The stock has other weaknesses too. Its dividends, while impressive, have been inconsistent. The company has cut them four times in the past decade. This to me suggests that more cuts are likely in the near future, especially going by the less than bullish forecast for its earnings. In fact, considering that the company has a dividend cover of 1.3 times, which is already low, if its earnings fall it will quite likely be unable to sustain these payouts. In other words, as an investor in the stock, not only should I brace for a lower dividends from the stock, but also a continued muted share price.
There could be other reasons to buy the stock, though. If the recovery picks up pace, commodity companies might still be gainers. Also, the stock’s price has fallen from the steep highs we saw earlier last year. So, if I expect an improvement in its prospects, this might be a good time to buy it before the stock starts rising again.
In fact, analysts’ estimates compiled by the Financial Times show an expected 7.4% increase in its share price over the next year. Some of the more optimistic analysts even expect a huge 67.4% increase in it! These are subject to change, of course, as the conditions around us evolve. But they do indicate the potential trajectory for the stock.
What I’d do
I have already bought the stock, and it has given me no reason to complain so far. But I am not sure I want to buy more of it right now. I would like to wait for its next update and its outlook to get a better sense of where the stock might head over the next year. In the meantime, I’m considering buying these stocks.
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Manika Premsingh owns shares of Evraz. 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.