“In recent weeks there has been an increasing amount of negative commentary around the outcome of Brexit and the impact it may have on the UK economy and housing market. This adds to a more general downturn in the market for expensive prime homes in London which has been evident for some time.”
That was the opening to the introduction from Telford Homes (LSE: TEF) on Wednesday, setting the scene for the company’s trading update ahead of its first-half results due on 28 November.
The firm’s comments address more than the London scene. I see them as indicative of the general malaise that’s afflicting the house-building industry in general after a spectacular decade of recovery-led growth.
Profit growth
But even with that caution, Telford reckons its first-half profit is set to “exceed the £8.7m achieved in the six months to 30 September 2017.” And on that front, the firm proposes to increase its dividend once again — and we’re looking at a nearly thrice-covered forecast yield of 4.7% for this year. Telford’s dividend is below the sector average, but it’s more strongly covered than most.
There’s some change in the mix, with Telford pursuing the build-to-rent market of late, and the firm seems to be near the forefront of building partnerships in an area that I think will prove fruitful over the long term.
And people are shunning Telford shares on a forward P/E of only a little over seven, with EPS growth expected? And those dividends? I still don’t understand the madness of crowds.
The biggest
On the same thinking, how can shares in one of the UK’s biggest listed house-builders, Taylor Wimpey (LSE: TW), be trading on a forward P/E multiple of only a little higher at 7.8?
We’ve seen a steady fall in the Taylor Wimpey share price since the start of 2018, with a loss of more than 20% so far — against a FTSE 100 drop of just 6.3%. The trend is clearly against house-building stocks, and I think that’s a mistake. In fact, I see it as an example of what commonly happens when a cyclical sector goes out of fashion.
Now, there are genuine reasons for concern when it comes to Brexit, and the very strong recovery in the house-building sector is surely over. But in my view, the boom was just a reaction to a serious undervaluation of the sector, and I now see it as a solid long-term investment.
Cash generation
If you want big dividends from the FTSE 100, you’re not going to find anything higher than Taylor Wimpey right now, with a forecast yield of a massive 9.3%. Admittedly, that includes a big wedge of special dividends, but a company that has a lot of surplus capital to return to shareholders doesn’t look to me like one to shun.
At its interim stage, Taylor Wimpey’s chief executive Pete Redfern spoke of positive employment prospects and strong demand for homes, saying that the company is “confident in our prospects for the remainder of the year and looking further ahead.”
For me, house-building is an undervalued sector, offering solid income prospects.
