Usually, investors face a trade-off between growth and income. Most high-income stocks have become such because they are at the end of their growth career. With no opportunities left to invest for growth, management returns cash to shareholders.
At the same time, high-growth stocks are not usually considered to be the best income shares because these companies retain capital for expansion purposes. Therefore, dividend yields tend to be significantly less than the market average.
However, Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW) are both defying the above trends.
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Thanks to the UK’s insatiable demand for housing, these two companies have been able to jack up profits and because the initial investment required to build houses is relatively small compared to profits generated, Persimmon and Taylor are returning a large chunk of their income to investors.
Shareholder rewards
Taylor reported its results for 2016 on Tuesday morning. The company reported a year-on-year rise in pre-tax profits before exceptional items of 21.5% to £733m for the year to December 31, up from £604m a year earlier. The firm’s average selling price rose to £255,000 from £230,000 for 2015. Revenues increased 17% to £3.7bn as the company completed a total of 14,122 homes.
Off the back of these robust figures, Taylor paid £356m to investors via dividends during 2016, which equates to 11.2p per share for a yield of 6.3%.
This year, the firm is targeting £450m of shareholder distributions, which I calculate as being worth 14p per share or a dividend yield of 7.8% at the current share price. In addition, City analysts believe the firm can chalk up a further 4% increase in earnings per share for 2017. Based on this forecast the shares are trading at a forward P/E of 9.3. Over the past five years, Taylor’s earnings per share have grown fourfold.
Too much capital
Taylor’s upbeat results come just a day after Persimmon revealed a 23% increase in annual profits to £783m in the year to 31 December 2016. Heading into 2017, management is optimistic about the company’s prospects with forward sales rising 9% to £1.9bn from £1.7bn and a continued gain in selling prices. Underlying gross margins increased by 2.4% to 27.8%.
Off the back of these impressive figures, management announced a further increase in the company’s capital return plan by £77m or 25p per share taking the total value of the plan to £9.25 over several years.
While management appears confident about Persimmon’s outlook, City analysts are not so upbeat. Consensus estimates predict Persimmon’s earnings per share will fall by 2% this year although at current prices the shares support a dividend yield of 5.4%.
Management knows best
Persimmon’s management knows the company and the housing market better than many City analysts, so this time around I’m inclined to believe that management’s upbeat outlook indicates a positive trading period ahead for the group.
Like Taylor, over the past four years, Persimmon’s earnings per share have grown fourfold and the shares currently trade at a forward P/E of 10.
