Here’s 1 cheap penny stock with an attractive dividend yield. Should I buy shares?

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Penny stocks that trade at very cheap rates, offer attractive dividend yields, coupled with significant market share in their respective sectors are a rarity. I believe I have found stock at Smiths News (LSE:SNWS) which ticks all the boxes above. Should I buy the stock or is it too good to be true? Let’s take a closer look.

Newspapers and magazines

Keep in mind that penny stocks are stocks that trade for less than £1. Smiths News is a UK-based wholesale distributor of published content such as magazines and newspapers.

So what’s going on with Smiths stock right now? Well, as I write, the stock is trading for 32p. At this time last year, the stock was trading for 38p, which is a 15% drop over a 12 month period. Many stocks have retreated since the turn of the year due to macroeconomic headwinds and tragic events in Ukraine.

Bull and bear case

Let’s start with some positives first. I noticed that Smiths had more than 50% market share in the UK for newspaper and magazine distribution. This significant advantage over competitors should allow it to perform consistently and offer generous returns.

Looking at the Smiths’ fundamentals, that’s exactly what it is. First, the stock offers a dividend yield of more than 7%. This is rare in penny stocks and the Smiths yield is higher than FTSE 100 an average of 3%-4%. I am aware that dividends can be canceled at any time. Furthermore, Smiths stock looks very cheap with a price-to-earnings ratio of just three at current levels.

While performance has remained consistent over the past few years, revenue and profit have dropped slightly — but more so in a bit. I’ve noticed that the Smiths have been doing massive cost-cutting exercises to continue to be profitable and generate a healthy volume of cash. It can also generate further dividends.

So for the negatives. Smiths operates in an industry that is in decline due to the rise and popularity of technology. Many of us access news, magazines and more on our smartphones and other devices. Traditional paper and its volume is decreasing. This is reflected in its declining performance as mentioned above. Smiths knows this too, which is why it cuts costs due to falling demand.

I believe the eventual decline to the minimum level of newspapers and magazines that need to be distributed will hamper Smiths business. This will affect investment performance, returns and viability. This came to my attention because I wanted to invest for the long term.

One penny stock I would avoid now

Based on my investment strategy of buying stocks for the long term, I’m not sure that Smiths News is right for me and my portfolio. I think the shrinking of the magazine and newspaper business will eventually make Smiths stock fall by the wayside.

The only way Smiths can continue its current momentum is if it finds alternative ways to make money and drive growth and performance. I won’t be buying stocks today, but will keep an eye on developments.