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A penny stock with a sizeable dividend yield tends to catch my eye. This is certainly the case with Steppe Cement (LSE: STCM) and its 20% yield. Yes, you read that correctly, 20%. Is the yield actually sustainable, and should I consider snapping up some shares? Let’s take a closer look.
Cement and electricity
As the name alludes to, Steppe is an investment holding company with a core focus on producing and selling cement from its base in Kazakhstan. It also makes some money from the transmission and distribution of electricity.
It’s worth remembering that a penny stock is one that trades for less than £1. As I write, Steppe shares are trading for just 27p. At this time last year, they were trading for 31p, which equates to an 8% drop over a 12-month period.
Breaking down the yield
High-yields are enticing, let’s be honest. But, I’m no fool (see what I did there) and tend to dig deeper and see what’s behind the curtain.
Such a high yield tells me a couple of things. Investor sentiment is plunging, or the business is struggling financially and the share price is falling off a cliff. Another thing some firms do is to boost their yields artificially to attract investors, even if they know they can’t sustain the payout.
So what about Steppe? In December, it paid a dividend of 5p, and based on its current share price, that translates into its mighty yield. However, after an impressive year in 2022, things look a bit more bleak this year. That’s based on the half-year results it released. The business reported that quantities and prices of cement have dropped. Its volume of cement has dropped by 10% compared to last year and revenue dropped by 13% too. Gross profit more than halved.
There’s a chance that Steppe turns things around and that the second half of the year is fruitful. Personally, I’m not convinced. Tough macroeconomic conditions including soaring inflation, rising interest rates, and supply chain problems could hamper it.
A penny stock I’ll keep an eye on
Cement isn’t exactly exciting. One fact that can’t be ignored is it’s a vital component of daily lives. It’s essential in pretty much any and all construction. When I think that the world’s infrastructure spending is only increasing, this could help boost cement businesses like Steppe.
Do I think Steppe will struggle over the long-term for customers and demand for its products? Probably not. However, there are bigger and much better-known businesses out there that can supply the same type of products, in my opinion.
Steppe’s dirt-cheap valuation with a 12 month trailing price-to-earnings ratio of just four is attractive on the surface of things. However, for me, the outlook for the business, recent results, and the sustainability of the yield lead me towards avoiding the shares.
Taking everything into account, I’m going to keep Steppe Cement shares on my penny stock watch list. I’m particularly keen to review the full-year results when they’re available. I think there are better small-cap opportunities out there for me and my holdings.
