At today’s share price of around 135p, retirement homes builder McCarthy & Stone’s (LSE: MCS) forward dividend yield runs close to 4.7% for the trading year to August 2019, and anticipated forward earnings should cover the payment around 2.8 times. But the shares have been falling, down around 53% since January 2016, and today’s half-year results show us why that might be.
A tough trading period
Although the average selling price achieved by the firm was up 15% compared to a year ago, most other financial indicators moved in the wrong direction. Legal completions fell 12%, underlying operating profit sank by 40%, underlying basic earnings per share plunged 51%, and net debt shot up by an uncomfortable 150% to almost £76m.
The firm puts the H1 outcome down to “ongoing subdued conditions in the secondary market” and fewer new “first occupations,” which it blames on “a pause in build start activity following the EU Referendum in June 2016.”
Looking forward, uncertainty surrounding the government’s proposals on ground rents continues to hang over the company and it said: “We continue to work with the government to seek an exemption from these changes due to the unique viability model of retirement housing.”
City analysts following McCarthy & Stone expect earnings to rise 10% for the year to August and 18% in 2019. The firm’s build programmes “remain on track” and the directors expect to return the balance sheet to a net cash position by the end of the current trading year. On the face of it, the immediate outlook is rosy, but the directors sounded a warning saying that fewer land exchanges and planning consents during the first half of the year means the growth trajectory for the business will be “more modest” over the next two years than they expected previously.
Chief executive Clive Fenton said the firm’s long-term prospects are positive because of a “growing need for retirement housing caused by our rapidly ageing population.” Nevertheless, with the stock locked in the grip of a downtrend and earnings looking peaky, I’m cautious about the company’s big dividend yield and mindful of its cyclicality.
Awash with cash
There’s an even bigger dividend yield available from FTSE 250 constituent housebuilder Bovis Homes Group (LSE: BVS). The big London-listed house builders all seem to be awash with cash and many have announced special dividends for 2018 onwards, including Bovis. With special dividends taken into account, Bovis has a forward yield running around 8.6% for 2018.
In 2017, revenue slipped 3% compared to the year before and earnings per share plunged 25%. However, City analysts’ forward earnings expectations are robust. They predict a 39% uplift this year and 14% during 2019.
Bovis is trading well, throwing off cash and the share price has been rising, but I’m too nervous to buy the stock. With both these two firms I ask myself, will the good times keep rolling? I know they are both highly cyclical firms and I know that cyclicals can look at their most attractive in terms of valuation and quality metrics when they are at their most dangerous. So, for me, the ‘right’ thing to do is to watch from the sidelines.
