The Motley Fool

A FTSE 100 stock yielding 10% that looks absurdly cheap right now

The share price of FTSE 100 house-builder Persimmon (LSE: PSN) has fallen by 20% in three months. Investors seem to have been spooked by Brexit fears and the risk that the Help to Buy scheme could end in 2020.

There’s no doubt in my mind that the housing market does face an uncertain outlook. But a crash isn’t a foregone conclusion.

Interest rates are still low, making mortgages affordable. Demand for new housing remains strong, with big rental landlords adding to demand from private buyers. I think it’s worth asking if this sell-off may have gone too far.

A 10% dividend yield

Like most of its peers, Persimmon is generating huge amounts of cash. My sums suggest free cash flow of £816m over the 12 months to 30 June. Of this, £728m was returned to shareholders through dividend payouts.

These cash returns are expected to continue. The group ended the first half of the year with forward sales of £2,120m, 6% higher than one year earlier. Management has committed to pay “at least 235 pence per share to shareholders each year” in 2019 and 2020.

This guidance gives the stock a whopping forecast dividend yield of 10% at current levels.

What could go wrong?

Net cash edged higher to £1,155m during the first half. This should be enough to cover the £1,090m of dividends scheduled for the remainder of this year and 2019. If profits remain stable, there’s no doubt in my mind that this stock is far too cheap.

The main risk I can see is that with an operating margin of 28%, this builders’ profits must surely be close to a peak.

If the housing market does start to slow, Persimmon’s share price could move rapidly down towards its net asset value of 906p per share — less than half the current share price of 2,300p.

Personally, I’m wary about house-builders. I don’t expect Help to Buy to be withdrawn without some kind of phasing-out period, but I do think the market looks expensive generally.

I’d continue to hold Persimmon for income, but I’d be reluctant to buy more.

One cyclical stock I own

New car registrations are down by 7.5% so far this year, according to data from the Society of Motor Manufacturers and Traders. After several years of strong growth, there seems to be some risk of a downturn in the new car sector.

However, used car sales appear to be holding up well, and this is an area where I have invested some of my own cash. My stock of choice is car supermarket Motorpoint Group (LSE: MOTR). This firm is the UK’s largest independent car dealer. It only sells cars under three years old and with less than 25,000 miles on the clock.

Still motoring ahead

In a trading update this morning, Motorpoint said that sales rose by 9% during the six months to 30 September. No new sites have been opened over the last year, so this suggests that trading is improving at the group’s existing locations.

Profit margins for the period are said to be “similar” to those seen last year, which sounds fine to me. Historically, this business has generated very attractive returns, as I’ve explained previously.

Today’s news has added 4% to Motorpoint’s share price at the time of writing. This puts the shares on 11 times 2018/19 forecast earnings, with a 3.4% yield. I’d keep buying at this level.

Want To Retire Early?

Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.

The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?

Roland Head owns shares of Motorpoint. 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.