Here’s 1 underrated passive income stock I’d buy and hold!

Zaven Boyrazian is boosting his dividend stream with this overlooked FTSE 250 income stock that looks perfectly positioned to thrive in the long run.

| More on:
Investor looking at stock graph on a tablet with their finger hovering over the Buy button

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The UK is home to a wide range of income stocks, not all of which get the praise they deserve. One company from my portfolio that seems to be lagging behind is Howden Joinery Group (LSE:HWDN). While the stock has climbed more than 40% in the last 12 months, on a multiples basis, it’s still trailing behind its industry average.

Today, shares of this kitchens and construction materials distribution business trade at a price-to-earnings ratio (P/E) of 11. By comparison, its peer group is hovering closer to 17. There are some valid concerns that could explain this discount. But in my opinion, income investors currently have a chance to consider snapping up a terrific business at a fair price. Here’s why.

Home renovation during inflation

With the cost of living going through the roof this year, kitchen renovation, among other rooms, isn’t exactly top of the priority list for most households. After all, a new kitchen can cost £10,000 or more. And with mortgages surging, not everyone has this level of disposable income at their fingertips.

The impact of this macroeconomic pressure is starting to be revealed in Howden’s financial results. Over the first six months of 2023, revenue came in basically flat, with operating profits dropping by 21.5%. Yet management still hiked dividends.

The drop in profitability doesn’t appear to be caused by inflation. In fact, gross margins are some of the highest in its industry at 61%. Instead, the firm has been deliberately spending money to introduce new operational efficiencies that should start to yield tangible results in 2024.

As for the flat sales, the cause is ultimately just temporary. Given that 2022 was a record-breaking year, I think it’s impressive that management was able to maintain its sales figures. Once inflation cools off and the economy stabilises, I’d expect to see revenue return to growth. In fact, Howden may be about to enjoy a new multi-year tailwind.

Profiting from higher interest rates

The Bank of England looks like it’s going to maintain interest rates at an elevated level for a while. Therefore, families are more likely to stay put for longer. And that might be the catalyst that sparks a rising demand for home renovation. In fact, a survey by the National Association of Home Builders revealed that home renovation demand is on track to rise again in 2024.

That’s obviously an encouraging sign. But like any prediction, it needs to be taken with a pinch of salt. Even if demand increases as expected, there are still some risks surrounding this business. Most notable is the threat of potential supply chain disruptions.

Even if just a few components are missing, tradesmen will be unable to complete renovations on time. And that might push customers to competitors like Bradfords.

The bottom line

No investment is without its risks. But in the case of Howden, I feel it’s one worth taking. The group has a fairly solid track record of defying expectations, with a long history of hiking dividends sensibly. Pairing all this with a modest valuation makes it an income stock I plan on buying more of.

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.

Zaven Boyrazian has positions in Howden Joinery Group Plc. The Motley Fool UK has recommended Howden Joinery Group Plc. 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.

More on Investing Articles

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

1 hot UK growth stock I’m buying right now

I've more than doubled my money on this UK growth stock. But with a 948% boost to earnings, I think…

Read more »