Can this cheap dividend stock help me beat inflation with an 18% yield?

Inflation has just hit 7%. As many investors look to outpace the cost of living rise, could this cheap dividend stock with an 18% yield help me do that?

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Key Points

  • Currently trading at such a cheap valuation, Ferrexpo does look very enticing.
  • This dividend stock has the potential to pay me a stellar dividend that can outstrip inflation.
  • Its volatile operations and inability to export its product make it a high-risk, high-reward stock.

Ferrexpo (LSE: FXPO) is the world’s third-largest exporter of iron ore pellets. Given that its operating base is in Ukraine, its share price has seen a decline of 40% year to date (YTD). However, the FTSE 250 company seems like a bargain as it is currently trading at a price-to-earnings ratio of one. It also offers a generous dividend yield of 18%, outstripping the current inflation rate. As such, I will be evaluating whether this cheap dividend stock is worthy of a position in my portfolio.

Mining its business

When in times of uncertainty, it always help when companies have solid fundamentals. Thankfully, Ferrexpo’s financials look great. With a 0.8% debt-to-equity ratio, decent levels of cash and equivalents, as well as heavy assets, I believe Ferrexpo is in a good financial position to withstand the current economic and political hardships.

Furthermore, the firm boasts an extraordinary profit margin of 46% in its most recent earnings report, showing good quality earnings. This allows the company to pay a generous annual dividend of £0.43 per share. Nonetheless, I attribute this to the spike in iron ore prices in recent times.

Ferrexpo troubles

Despite the iron ore exporter’s solid fundamentals, I see its revenue stream remaining choppy in the short-to-medium term. There are several reasons for this. I worry that Ferrexpo might not be able to continue its mining operations at optimal levels. This would limit potential revenue, as its latest trading update cited an 11% decline in production from the previous quarter. Additionally, it faces logistical issues with almost half of its products sitting in inventory. This is due to the closure of the Pivdennyi port in south west Ukraine. Having said that, management is “reviewing alternative methods of delivering products to seaborne markets.”

Until these logistical issues can be resolved, Ferrexpo’s outlook remains uncertain. I expect revenue to take a hit for the foreseeable future. This could in turn affect the firm’s future dividend payments. On top of that, Ferrexpo normally declares a dividend in March, but it is yet to do so this year. Hence, dividend investors are steering clear for now, despite its attractive yield.

Ironing things out

There were silver linings from its latest trading update though. Firstly, Ferrexpo is still running its operations, provided that it’s safe to do so. This comes as a bit of a relief to me because its operations are located outside the main conflict zones. Secondly, the delivery of pellets to customers in Europe has also resumed via rail and barge. These customers have historically represented approximately 50% of its revenue. This should give investors some hope that the dividend giant can resume payments soon. Finally, with iron ore prices currently trading at $145 a tonne, this should push the company’s margins higher.

Nevertheless, I think this cheap dividend stock still remains a high risk one to invest in. Although the firm has historically declared a dividend in April, I do not see it happening this time due to the current climate. So with all that in mind, I will not be buying Ferrexpo shares for my portfolio.

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.

John Choong has no position in any of the shares mentioned at the time of writing. 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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