I’d buy this penny stock with its 5% yield and growth prospects before it soars!

Our writer breaks down this penny stock with its current enticing yield and explains how growth potential could help it soar.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young black colleagues high-fiving each other at work

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

One penny stock I’ve added to my buy list for when I next have some cash to invest is Michelmersh Brick Holdings (LSE: MBH). Here’s why!

Bricks and tiles

Michelmersh is a manufacturer of brick, tile, and other building materials, based in Telford, UK. It operates out of its own landfill site, and manufactures its products.

As I write, Michelmersh shares are trading for 82p. They’ve experienced a slight downturn over a 12-month period as they were trading for 95p at this time last year. This equates to a 13% drop.

I’m not worried about this drop. It’s worth noting many stocks have struggled due to market volatility brought on by soaring inflation and rising interest rates. Tragic geopolitical events haven’t helped markets either.

Solid foundations and exciting growth potential

Michelmersh’s passive income opportunity immediately captured my attention. A dividend yield of 5% is higher than the FTSE 100 average of 3.9%. However, I’m conscious that dividends are never guaranteed.

Next, Michelmersh shares look decent value for money right now on a price-to-earnings ratio of just over eight.

From a growth perspective, I reckon Michelmersh could soar in the coming years, especially once market volatility cools. To start with, demand for construction products involving bricks and tiles should soar. This is linked to the chronic housing shortage in the UK. At present, demand is outstripping supply by some margin. This shortfall needs to be tackled and the government recognises this.

Another aspect that could boost Michelmersh is the fact it operates in the premium brick market. Like any product in the world, you can buy superior and inferior products. Michelmersh owns some of the largest premium brick brands in the UK. This could represent an additional revenue stream for those looking to construct with higher-end materials.

A brief trading update provided last week explained the business is performing resiliently despite the current headwinds. The business is operating at full capacity and explained this is due to a healthy forward order book.

Finally, taking a look at Michelmersh’s balance sheet, I’m pleased to see it has plenty in the bank to stave off current volatility. A solid balance sheet is vital during market volatility, especially for small-cap shares.

Risks and conclusion

Despite my bullish attitude towards Michelmersh, I must note that shorter-term performance could be hurt. Due to higher interest rates, mortgages have become increasingly difficult to obtain. In turn, this has led to a drop in house sales. Furthermore, soaring costs are making it tougher for housebuilders as well. All this has led to a drop in houses built, despite the shortage. This could impact Michelmersh’s performance and potential payouts.

Overall Michelmersh looks too good for me to miss out on right now. An attractive valuation, enticing passive income opportunity, as well as potential growth avenues have helped me decide to buy some shares when I can.

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.

Sumayya Mansoor 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.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

3 top FTSE 100 value shares I’d buy before August!

These FTSE 100 heavyweight shares have considerable long-term potential. And at current prices, I think they are too cheap to…

Read more »

Investing Articles

Here’s why I’m selling my Lloyds shares to double down on this FTSE 100 stock

Our writer digs into why he prefers HSBC over Lloyds shares right now, despite both performing really strongly in recent…

Read more »

Investing Articles

I’d invest £12,500 in this 1 stock to bag £1K of passive income!

Building a passive income stream through dividends is one of this writer’s biggest ambitions. Here’s how one stock could help.

Read more »

Investing Articles

3 cheap stocks to consider buying for the AI revolution

Investors looking for AI stocks to buy might be worried about high valuations amid current market euphoria, but these three…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Earnings up 20%! But this UK small-cap stock may just be getting started

Are we about to see enduring growth from this UK small-cap business with a rising stock price ahead over the…

Read more »

Investing Articles

1 FTSE 250 stock I’d give a wide berth… for now

One of the worst performers on the FTSE 250 index is a stock that Sumayya Mansoor has decided she won’t…

Read more »

Investing Articles

The FTSE 250 is brimming with potential, especially in stocks like this one

The main Footsie index gets all the attention but its little brother, the FTSE 250, is full of growth potential.…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

What on earth happened to the Premier African Minerals (LSE:PREM) share price?

The Premier African Minerals (LSE:PREM) share price is down a whopping 85% in the last year, so what happened? Gordon…

Read more »