As a risk-averse investor, I’m always on the lookout for FTSE 100 shares to add to my Stocks and Shares ISA. Although there are no guarantees, the UK’s largest listed companies typically deliver the fewest surprises meaning their share prices are generally less volatile.
However, last week, Vistry Group (LSE:VTY), the Footsie housebuilder, proved this isn’t always the case.
On 8 October, its shares closed 24.3% lower after the company disclosed that the “total full-life cost projections” to complete nine of its developments had been underestimated by around 10%.
It didn’t elaborate as to what went wrong, other than to say that changes to the management team were under way.
Whatever the cause, it’s a costly mistake.
At one point, the shares were down 34.7%. By Friday (11 October) it had the smallest market cap (£3bn) of all the stocks in the FTSE 100. Relegation to the FTSE 250 is a distinct possibility if that doesn’t change.
A costly mistake
Although isolated — the company has 300 developments under way — the error means profits will now be £115m lower over the next three financial years (2024-2026).
Shareholders will be devastated by the news. Despite well documented problems with the housing market, the company’s financial performance has been resilient.
It remains on course to sell 18,000 properties in 2024, an increase of 11.7% on 2023. And 50.6% more than in 2022.
Doing things differently
Vistry is different to other housebuilders because of its emphasis on partnering with local authorities, housing associations and private rented sector bodies.
It describes its business model as “capital light”. Indeed, during the six months ended 30 June 2024, 76% of its completions were partner funded.
And this approach gives it a class-leading return on capital employed (ROCE). In 2023, it reported a ROCE of 21.3% compared to, for example, Persimmon’s 10.5%.
Is there an opportunity here?
But despite the pullback in its share price, I don’t want to buy any Vistry shares at the moment.
In my eyes, its reputation has been dealt a severe blow as a result of last week’s news. Such a basic mistake is unforgivable.
However, even if the company was able to properly estimate its costs, I wouldn’t want a stake. That’s because I already have exposure to the construction sector — whose stocks have a reputation for paying generous dividends — through my shareholding in Persimmon.
Admittedly, it’s significantly cut its payout as a result of the downturn in the property market. However, it’s still yielding 3.8%, identical to the FTSE 100 average.
By contrast, Vistry doesn’t pay a dividend.
Instead, after “extensive consultation with its shareholders” it’s decided to pursue a policy of share buybacks.
I’m not going to debate the pros and cons of a company buying its own stock. But some claim it’s better for shareholders because they’d have to pay tax on any dividends received. However, they wouldn’t have to if a stock was held in an ISA anyway.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Personally, I’d rather have the cash in my hand.
To sum up, due to concerns about its poor internal controls and the absence of a dividend, I’m not going to take advantage of the dramatic (and unexpected) fall in Vistry’s share price.
