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Is this Neil Woodford 7.5% yielding dividend stock a ‘buy’?

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Neil Woodford is well known for taking large stakes in his favourite stocks and the latest company to join this club is homebuilder Crest Nicholson (LSE: CRST).

Woodford has owned a stake in this company since last April after he reportedly “identified an opportunity in the sector for income investors.” It would appear that he is still highly confident on the outlook for the industry, having increased his bet on the business from 5.21% to 10.34% at the beginning of last week. This significant position now means Woodford Investment Management is the firm’s largest shareholder.

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Neil Woodford has faced plenty of flack recently following some major setbacks in his portfolio. The implosion of subprime lender Provident Financial and the slip-up at outsourcer Capita have dented his reputation as one of the UK’s best stock pickers. However, I believe his investment in Crest might be worth a second look for investors seeking a cheap income play.

Betting on income 

Crest has a strong balance sheet, wide profit margins and is a relatively stable business, unlike almost all of Woodford’s failures. For example, at the end of 2017, the company had a net cash balance of £37m and reported an operating profit margin for the year of 20.3%. In comparison, both Provident and Capita were highly leveraged businesses with tight profit margins, which left little room for manoeuvre when the unexpected happened.

As well as an impressive financial profile, shares in Crest are also incredibly cheap. At the time of writing the stock trades at a forward P/E of just 6.5 and supports a dividend yield of 7.8%. Usually, such a cheap valuation is a sign that the market does not believe that the company has much of a future, and investors should stay away, but it does not look as if this is the case with Crest. Indeed, City analysts are expecting earnings per share to grow around 25% over the next two years as the firm continues to benefit from robust demand for housing in the UK. 

Even if home sales start to contract, the business should be able to weather the storm. As mentioned above, Crest has a cash-rich balance sheet, which should allow it to survive any downturn. At the same time, management should be able to cut costs relatively quickly if the market starts to cool due to the nature of the building business.

A top dividend play

The market’s best income stocks tend to have two key traits, strong balance sheets and wide margins, and Crest ticks both of these boxes.

Even though it is impossible to tell what the future has in store for the UK housing market, it is clear that as long as there remains a demand for new homes, Crest should be able to profit from this and management will return the majority of this income to shareholders. With this being the case, I believe Crest could be a great addition to your income portfolio. The low valuation and high single-digit dividend yield more than make up for the uncertainty surrounding the broader housing market.

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Rupert Hargreaves owns no share 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.

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