Nobody knows what will happen next in the property market. But one thing we do know is that however many properties are built in coming years, a lot of them will need bricks. That could be good news for brick manufacturers such as Ibstock (LSE: IBST). In fact, there are several things that appeal to me about the prospect of owning Ibstock shares. Here are three of them.
1. Resilient long-term demand
Like humans, buildings have a lifespan. Not many are around for centuries and some last barely a few decades before being torn down and replaced. Although the variety of building materials today is broad, bricks remain essential for the building trade. The UK gets through a couple of billion bricks a year. But their weight means it can be more economical to buy locally than import them from far away.
That adds up to a pretty attractive sector in my view. A local manufacturer has an inbuilt advantage and customer demand remains high centuries after the industry began. On top of that, when was the last time you saw a brick you thought was new and different? Possibly never! Even without spending on new product research and development, the industry is able to benefit from strong customer demand.
But demand, while resilient, is still subject to market forces. If a worsening economy leads to fewer new building projects, revenues at brick makers like Ibstock could fall.
2. Ibstock has an attractive competitive advantage
Billionaire investor Warren Buffett talks about a company having a moat that helps fend off competitive attack, just as happened at medieval castles. That can help give it pricing power, which is good for profit margins.
I think Ibstock has such a moat, in the form of its network of clay mines. It is almost two centuries since the first mine shaft was sunk in the town after which the town is named. Today, Ibstock is the UK’s leading manufacturer of bricks. That process relies on clay or shale. The company owns 18 active quarries, with around 72m tonnes of proven freehold clay reserves. On top of that, it has long leases on other clay quarries.
This exclusive access to reliable sources of clay gives the firm a strong long-term competitive advantage in my view. It makes it easier for Ibstock to control costs than if it relied on buying in its clay from a third party. That said, it does also add the risk of ongoing maintenance costs even if a dip in market demand means some quarries have to be mothballed.
3. Ibstock shares have a 4.2% dividend yield
At the moment, the dividend yield on Ibstock shares means I would consider them for my portfolio as an income pick. At 4.2%, it is far from the highest yield in the market. But I do find it attractive enough to consider buying the shares as part of a diversified portfolio.
The dividend is still less than half of what it was before the pandemic. That illustrates that another demand shock could lead to a dividend cut. Then again, if the company continues to do well, I also see potential for future dividend growth.
