This FTSE 250 construction materials group is not often seen among the obvious stocks to buy for second income. But Breedon (LSE: BREE) now offers an unusual value opportunity.
The shares look materially undervalued relative to their strong balance sheet, high dividend yield and impressive earnings growth forecasts.
This creates an unusual mix of income strength and long‑term potential price gains.
What’s the engine powering gains?
Earnings growth is the powerhouse for sustained rises in any firm’s share price and dividends over time. A risk here for Breedon is cost inflation outpacing pricing power. Another is a sharper‑than‑expected slowdown in UK construction activity.
However, analysts forecast its earnings will rise by an annual average of 12.1% over the medium term at least.
The projection looks well supported by its full-year 2025 results, released on 11 March this year. These showed free cash flow up 17% year on year to £527m as revenue rose 9% to £1.714bn.
So what sort of profits are in view?
Precisely where earnings growth will drive a stock’s price is best determined by discounted cash flow (DCF) analysis, in my experience. And knowing the difference between price and value is crucial for long-term investor profits. That is because share prices tend to converge to their fair value over time.
DCF identifies the ‘fair value’ of any share, based on the business’s future cash flows. These are then discounted back to the present day to produce a per-share price.
If those forecasts are less clear, the discount applied increases, and differing assumptions here can produce varied outcomes from analysts. Using my own assumptions — including a 9.8% discount rate — Breedon looks 66% undervalued at its present £3.01 price.
That suggests a fair value of £8.85 — more than double where the shares trade today.
If markets continue to trade toward fair value, this could be an outstanding potential buying opportunity, provided those DCF projections hold good, which is not guaranteed.
How much dividend income while waiting?
The wait for these potential price gains to be realised will be made a whole lot easier by dividend payments in the interim. These can go up or down over time, as share prices and annual payouts alter, of course.
However, analysts expect Breedon’s dividend yield to increase to 6.2% by 2028. Using this as an average, £20,000 in the stock would make £17,119 in dividends after 10 years. It also assumes these payouts will be reinvested in the stock to harness the full turbocharging effect of dividend compounding.
After 30 years on this basis, these payouts could rise to £107,861. With the original £20,000 included, the holding could then be worth £127,861.
And that could pay a yearly income of £7,927 from dividends alone.
My investment view
I think Breedon combines a very deep undervaluation with a strong balance sheet and robust earnings growth forecasts.
This makes it one of the most compelling deep‑value income opportunities in the FTSE today, in my view. Consequently, I think it well worth the attention of investors whose portfolios it suits.
I already own a stock in the housebuilding sector (Taylor Wimpey). Owning another would unsettle the risk/reward balance of my portfolio. However, I am looking at similar deep‑value income opportunities to Breedon in other sectors.
Should you invest £5,000 in Breedon Group Plc right now?
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Simon Watkins owns shares in Taylor Wimpey.
