Regular readers will know that I’m a long-time holder of shares in Barratt Developments and Taylor Wimpey. I bought into them on the back of their gigantic dividend yields and the prospect of big shareholder rewards stretching long into the future, reflecting the UK housing market’s sizeable supply/demand imbalance and government failure to get to grips with this.
But fresh developments regarding the long-running Brexit saga, as well as fresh comments by the housing minister on Help To Buy, has cast some doubt over whether the FTSE 100’s homebuilders are in fact beautiful blue-chips or high-risk investment traps.
Bad news?
It seems sensible to address, for stocks with a high gearing to the UK economy at least, that persistent elephant in the room first. Brexit.
The implications of a no-deal withdrawal on equity markets in the near-term and beyond, as well as the possibility of a lengthy delay to Article 50 and the potential for additional political squabbling for up to two years, have been done to death on these pages of late and so I’m not going to repeat them again, click here for a brief recap.
One thing is clear though. The political stalemate in Westminster means that either a disorderly or a lengthened Brexit process now appears on the cards, situations that could both weigh on homebuyer confidence in the near-term and beyond.
These fears are nothing new, as are concerns over the future of the government’s Help To Buy purchase scheme. But housing minister James Brokenshire fired a fresh warning shot to homebuilders over the future of the programme last week. Speaking to the Home Builders’ Federation annual conference, he said that he’ll be “considering carefully how the developers who work with us meet the standards and quality that customers expect and deserve” before finalising details on the new Help To buy programme, which will likely run until 2023.
The comments came in the wake of renewed allegations of shoddy workmanship levelled at Footsie play Persimmon, the latest new-build specialist to emerge in the crosshairs more recently.
10% dividend yields
It’s clear the housebuilders will have to get their act together and improve homes quality to keep politicians onside, and I fully expect them to. Not that I’m expecting the government to pull the purchase scheme any time, either. So muddled is official policy to support buyers that they have little option but to maintain Help To Buy to curry favour with the country’s aspiring homeowners.
Similarly, while Brexit is casting a cloud over home sales, I expect demand to continue outstripping supply regardless of how the country exits the European Union. The number of new homes has stagnated at around the 165,000 marker for the past two years. And there’s nothing to suggest the government will get anywhere close to its 300,000-per-annum target by the mid-2020s any time soon. I expect bookings at the likes of Taylor Wimpey, Persimmon and Barratt to remain solid.
Right now, these firms all carry dirt-cheap valuations. In other words, forward P/E ratios all below the bargain-basement gauge of 10 times and below, while corresponding dividend yields range between a titanic 7.5% and 10.5%. My belief that the builders are some of the most attractive shares to buy today is unshaken. I expect them to deliver stunning shareholder returns many years into the future.
