This FTSE 100 stock now yields over 10% but I think now is the time to buy not sell
With Brexit concerns weighing on stocks, and after early October’s market fall, the yields on some big UK companies has now reached much higher levels. This is great for investors seeking incomes at a time when bank interest rates on savings remain pitiful, provided of course that the yields are sustainable and are underpinned by profits.
Hit to housebuilders
The housebuilder Persimmon (LSE: PSN) is one company that I think now looks to be offering investors great income, that crucially can be sustained. The dividend yield has shot up to over 10%, which is why I’m holding on to my shares in the company. Coupled with a price-to-earnings (P/E) ratio that’s below nine, this signals to me that the shares are hugely undervalued and therefore in time should shoot back up. But is there a good reason they’re so undervalued that would make me not want to own the shares?
Not really. Earlier this month, Persimmon announced that its CEO would be standing down at the end of the year following well-publicised controversy over his huge bonus, which has to some degree overshadowed the whole company and some might argue the whole sector. On the upside though, at the same time, the company announced that sales in the period since it reported half-year results on 21 August were 3% ahead of where they were a year earlier. Persimmon said homes for 2018 are fully sold and that it has secured around £987m of forward sales reserves beyond 2018. This is up 9% on this time last year.
Brexit, in particular, means the housebuilding sector is out of favour at the moment, which makes me think investing now is the right time. I don’t believe house purchases will stop just because we are no longer in the EU. The sector’s share prices are lower, which should lead to bigger returns for investors willing to invest in a sector that other investors are shunning. Persimmon looks to have been among the hardest hit recently, so should have the most to gain as sentiment around housebuilders improves.
Dialling up faster growth
BT (LSE: BTA) is another company experiencing change at the top. It will have a new CEO early in 2019. It has been struggling for longer than Persimmon, in the last five years its share price having been cut by about a third. This could all change though if the new CEO continues to preside over results that have been improving. And if he does, I think the stock looks good value for investors buying now.
This is because the dividend yield is a little over 6% based on the current share price. BT also benefits, like Persimmon does, from a low P/E. At a little over nine, the P/E really does mean investors have some margin of safety against any bad news.
Thankfully though, the most recent news has been positive. Just as the CEO is leaving, BT’s turnaround seems to be taking hold. In the first half, reported profit before tax jumped 24% to £1.3bn and earnings per share (EPS) rose by 29% to 10.6p. The share price rose on the better-than-expected update. If the next results and the impact of a new CEO can also boost investor sentiment, then the share price could start to climb.
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Andy Ross owns shares in Persimmon. 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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