Down 35% with a 5% yield! Is this the cheapest dividend stock on the FTSE 250?

When looking for attractive dividend opportunities, I often turn my attention to the FTSE 250. Unlike the heavyweight FTSE 100, this mid-cap index is packed with undervalued stocks frequently offering higher dividend yields. For investors with an eye for value, it can be a hunting ground for hidden gems.

One share that stands out to me at the moment is Petershill Partners (LSE: PHLL). While the name might not be familiar to every investor, there’s a lot going on beneath the surface that I think is worth exploring.

A financial look at Petershill

Petershill was established by Goldman Sachs back in 2007 as a means to provide investors indirect exposure to the lucrative private equity market. It floated on the London Stock Exchange in 2021 and currently manages around $8.5bn in assets.

Unfortunately for early investors, the share price hasn’t been kind. Petershill lost around 10% of its value shortly after listing, and today sits 35% lower than where it started three and a half years ago. However, that decline is exactly why it’s popped up on my radar.

The shares currently change hands for just £2.27, which looks remarkably cheap when stacked against earnings. Its price-to-earnings (P/E) ratio’s only 3.82, and its price-to-book (P/B) ratio’s just 0.6. On paper, this suggests the market might be significantly undervaluing the company’s earnings power and underlying assets.

Dividends and profits

Turning to income, Petershill sports a dividend yield of 5.2%, well covered by a low payout ratio of 19.5%. This means there’s plenty of room for dividends to keep flowing even if profits take a modest knock. That said, it doesn’t have a long history of paying or growing dividends. While the payout’s been rising at roughly 3% a year since 2022, there’s no guarantee this trend will continue.

Looking under the bonnet, Petershill seems solidly profitable. Its return on equity (ROE) sits at 16.46%, and it boasts an astonishing operating margin of 299.5%, highlighting the high-margin nature of alternative asset management. Free cash flow margins are also strong at 59.2%, supporting dividend payments and operational flexibility. On the balance sheet side, it’s reassuring to see a healthy £4bn in equity against only £464m in debt.

Risks and forecasts

Of course, no investment is without risk. Petershill operates in the private equity space, which tends to be more opaque and can be vulnerable to downturns if economic conditions sour. There’s also concentration risk – if the private equity sector underperforms, it could hurt overall profits.

Even so, analysts remain optimistic. The consensus view is for the share price to rise around 20% over the next year, helped by the fact Petershill has beaten earnings and revenue expectations for three years running. Forecasts suggest this momentum should continue.

So is it a buy?

All things considered, Petershill looks like one of the cheaper income plays on the FTSE 250 right now. A 5% yield supported by healthy cash flows, plus rock-bottom valuation multiples, is hard to ignore.

Personally, I’d want to keep an eye on how its private equity investments perform in a potentially softer economic climate. But for income seekers willing to accept the unique risks of alternative asset management, it’s a compelling option to consider for a diversified dividend portfolio.

The post Down 35% with a 5% yield! Is this the cheapest dividend stock on the FTSE 250? appeared first on The Motley Fool UK.

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Mark Hartley has no position in any of the shares mentioned. 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.