1 old penny stock I’ll buy for passive income

When I think of a penny stock, I tend to imagine a struggling business with a weak structure. balance. Or a mining explorer whose promises are heavy but whose content is light. Of course there are plenty of these around.

However, some small-scale firms regularly make profits and even pay dividends. Here I’ll take a look at an old penny stock that I would buy today if I had spare money in my investment account.

Technical specifications

Before we get started though, why do I use the phrase ‘old’ penny stock? The common definition of a penny stock is one that trades for less than 100p. And A. market value Under £100 million.

In the case of Michelmersh Brick Holdings (LSE: MBH) has a market capitalization of £97m but its share price is 104p (just above the threshold after a 28% one-year rise). Hence the ‘old’ penny stock business.

But despite its recent rise, the share price remains 34% below its all-time high of 158p reached in April 2021.

luxury bricks

So what does the company do? As the name suggests, it sells bricks. However, it tends to specialize in premium bricks and pavers and owns many high-end brands.

These are the projects that real estate developers will choose for luxury residential and commercial projects. And these generally have higher profit margins compared to standard bricks (Michelmersh has a solid 36% gross margin).

The company produces and manufactures more than 125 million bricks and pavers each year. It also operates a landfill.

Durability

As we know, the construction industry has been going through a really difficult process for the last few years. House builders were beaten. This was clearly seen in the company’s first half results. Revenue fell 15.7% year on year to £35.4 million, while adjusted pre-tax profit fell 22% to £5.3 million.

The main risk here is that the construction market will weaken further. And another rise in inflation certainly wouldn’t help.

However, more broadly the industry has seen a 40% decline in brick volume demand for the 18 months to June 2024. Michelmersh’s decline was not so serious; This highlighted the resilience of the business and even its ability to grow market share in a challenging environment.

Meanwhile, the company has a strong balance sheet. It had no debt at the end of June and its net cash position was £4.1 million.

Reassuringly, management said order intake was at levels not seen since 2022. The 6.7% increase in the interim dividend shows the company’s confidence in the future.

Everything points to a gradual recovery.

Passive income potential

Looking further ahead, the UK will need to build millions of new homes (of all types) and spruce up aging public spaces. This seems like a lot of bricks to me.

This should support earnings and dividend growth over time. Currently, the stock offers a forward yield of 4.7%. Although no dividends are guaranteed, I am assured that the potential payout will be comfortably covered by expected earnings.

The icing on the cake is an attractive valuation. Based on earnings per share estimates for 2025, Michelmersh trades at a modest forward price-to-earnings ratio of just 10.7.

All in all, I think the stock offers excellent value today at 104p. I’m thinking of buying it if I have cash on hand.