With good returns, reasonable valuations and attractive market-to-book valuations, is now an excellent time to buy into the housebuilding sector?
Today we’ll look into six housebuilder stocks paying particular attention to dividend yield and how secure that yield is going forward, how well each company compares regarding valuations and think about how the broader economy could impact the businesses in the medium term. The six companies we’ll focus on are Vistry Group (VTY), Barratt Developments (BDEV), Redrow (RDW), Bellway (BWY), Taylor Wimpey (TW.) and Persimmon (PSN). So, should we add any of these companies to our portfolio?
A bit of background
Obviously, with inflation being high in the UK and interest rates rising in an attempt to counteract this, the affordability of buying a house is under pressure, particularly for first-time buyers who (a) may well be paying higher rents due to the aforementioned higher interest rates but also (b) will likely need to put down a larger deposit as banks are seeing increasing risk and will need to make higher monthly payments. Will this lead to house prices dropping? It could and inflation doesn’t just impact the costs of buying eggs and avocado pears, it could lead to building cost inflation for the housebuilders such as higher wages, material costs and even potentially increasing the costs of loans they may have. So perhaps a bad cocktail of lower selling prices, less demand and higher outgoings? Won’t this upset those good returns mentioned above?
Well yes, dividends from housebuilders are often changing depending on the wider sector and are not as reliable as say the utilities or even financial sectors tend to be. As such the dividend at Persimmon has been cut quite drastically. Down from 235p to 60p, that’s a 75% drop. However, the share price has dropped quite a bit in this period so in terms of yield they are still quite competitive and perhaps the new valuation is a decent buy. Just for clarity, Vistry and Barrets have also cut their payments but not quite as severely.
Housebuilders also tend to have stockpiles of land that they purchased years beforehand, potentially at very good prices, these may well have been purchased with no planning permissions (or any hope of at the time) and as villages and towns have grown these areas are now prime for building large estates, sounds like a great business. Unfortunately though in a downturn land values can drop much quicker than property values, this will mean balance sheet amendments with potential reductions in the total assets values. This would throw the market-to-book valuations out of whack considerably as land is one thing that housebuilders will tend to have lots of stock of.
There is also the other slight concern which is the end of the Help to Buy scheme last year, whether you think it was a good thing or not for the sector overall is debatable but it certainly helped the new build market specifically and with it ending at a time of increasing interest rates it seems likely to be replaced swiftly. The new offer may not be as favourable for housebuilders though and we await an announcement.
I understand all that but which company is best value?
OK, so let’s delve into some detail and put up some really basic tables to break it down a little. First, we’ll cover the dividend and its relative safety.
Dividend Payments
| Company | Yield | Div Cover |
| Vistry Group (VTY) | 7.16% | 0.07 |
| Barret Developments (BDEV) | 7.57% | 0.84 |
| Redrow (RDW) | 6.44% | 0.86 |
| Bellway (BWY) | 6.07% | 0.41 |
| Taylor Wimpey (TW.) | 8.07% | 1.49 |
| Persimmon (PSN) | 4.85% | 1.93 |
Oh dear, I just checked back on what I wrote when comparing the banking sector using this exact table, I said two and a half times is pretty safe. Well realistically anything more than two times is safe really but anything less than one is quite risky, I suppose it all depends on how much cash the company has and its willingness/confidence to keep paying the dividend until the good times return.
The above doesn’t make for good reading though, we’ve already touched on Persimmon, Vistry and Barretts cutting their dividend. Persimmon being the most drastically shredded but they seem to be on a better footing now. The only standout here (other than the shockingly low cover on average) is Taylor Wimpey offering over 8% and still covering the dividend comparatively well.
Taylor Wimpey crowned the winner of the dividend competition. Although 5% from Persimon is not to be sniffed at and they do cover this slightly better.
Next the market-to-book ratio, another good indication of value for comparison.
Market-to-Book
| Company | Share Price | Book Val. Share Price | Variance | Var. % |
| Vistry Group (VTY) | 768p | 940p | 172p | 18% |
| Barret Developments (BDEV) | 474p | 575p | 101p | 18% |
| Redrow (RDW) | 497p | 589p | 92p | 16% |
| Bellway (BWY) | 2308p | 2744p | 436p | 16% |
| Taylor Wimpey (TW.) | 116p | 127p | 11p | 9% |
| Persimmon (PSN) | 1238p | 1077p | -161p | -15% |
For the most part, the above appear to indicate some value is attainable, obviously, we need to take into account any potential write-downs if land values were to drop as mentioned previously. So, in this instance, Vistry and Barretts have come out on top but let’s remember that neither of these companies are covering their dividend payments very well which is the only other thing we’ve covered so far and in fact Vistry are barely covering the payment at all.
“the fact that a company isn’t paying a dividend can mean more money for the company to put towards growth”
… me, just a bit further down the page.
I think I will remove Vistry and Bellway from the competition as their dividend cover is too low and therefore at risk of being cut. Also, the variance in market-to-book is not vastly superior to the others, certainly not enough to make me reconsider the dividend cover.
I think I should mention at this point that it’s not all about dividend payments (although I know I’m typing this in such a way that it seems like it is, the reason I’m looking at housebuilders is for income however) but if you can purchase a company at a low point while they are still maintaining payments and things turnaround then you can get fantastic yields. But for complete clarity, the fact that a company isn’t paying a dividend can mean more money for the company to put towards growth (or staying afloat) and thus leading to an increase in share values over time.
Next, a very quick look at the price-to-earnings ratio…
Price-to-earnings
| Company | P/E |
| Barrett Developments (BDEV) | 15.69 |
| Redrow (RDW) | 18.03 |
| Taylor Wimpey (TW.) | 8.3 |
| Persimmon (PSN) | 10.71 |
Taylor Wimpey stands out here as being the best value with a low P/E of little over eight, I would say they’re actually very good value at present. Persimmon coming a close 2nd but they don’t pay as good of a dividend since reducing the payment last year.
Value Summary
I must admit that I’m already heavily leaning towards Taylor Wimpey, they have the highest dividend yield, cover it relatively well and based on the above-limited research are the least expensive company to buy while also maintaining a lower share price to book cost. I won’t write off the other three yet though, I need to look into more detail and then weigh things up. I currently don’t have any shares in this sector so need to feel confident that we can not only maintain dividends but also see some growth which will mean the wider markets picking up.
Let’s do some proper research then
I’m going to spend a few hours searching for all sorts from the four companies that made it this far and summarise with bullets below.
Firstly, some Barrett Developments (BDEV) negatives
- Dividend cut already and from what I’m reading it could be cut further.
- Construction activity reducing, 303 homes built per average week to the end of April 2022 was higher at 359 (this could also be seen as simple planning for the downturn we are potentially witnessing).
- Value of forward sales down from £4,505.5m (24th April 2022) to £2,956.5m at the same stage in 2023.
and the BDEV positives
- Share buy-back in operation, total £200m, to date 21st April £38.6m shares had been purchased for cancellation.
- Quite a substantial lump of cash compared to peers could be in a strong position when the wider market picks up.
Redrow (RDW) negatives
- Earnings per share already slipping year on year.
- Not as much cash as competitors to ride out a downturn.
- Although the dividend is being held at present it does appear to be at risk of being cut which would have a knock-on effect on the share price.
now the plus points
- They’ve maintained the interim dividend payment to date.
- Miniscule debt levels with cash levels steadily increasing over the previous 3 years.
- Berenberg upgraded Redrow (466p to 643p), they felt their asset-backed valuation was amongst the best in the sector.
Let’s look at the negatives for Taylor Wimpey…
- Likely to be between 9k and 10.5k home completions for 2023, down from more than 14k in 2022.
and now some positives
- It is felt that being at the higher end of the housing market could be beneficial in a higher-interest environment as wealthier buyers are likely less reliant on debt.
- They actually increased the dividend for the end of last year and stated they’re prepared for a 20% slide in house prices and a 30% fall in volumes.
Last but not necessarily least, Persimmon (PSN) negatives
- They relied quite heavily on Help to Buy which is now closed.
- Dividend has been slashed already due to a sales slump.
- The total number of homes completed is expected to be as low as 8k, down from 14k for the previous 2 years.
Persimmon positives
- Debt levels are non-existent.
- Dividend has been slashed already due to a sales slump, these payments can now go towards future growth.
Sector Analysis
Sector negative bullets….
- Cooling down of the UK housing market, house prices were 1% or £3k less in May this year than they were in 2022 according to Halifax (who were more positive than Nationwide at 3.4% down).
- Inflation still stubbornly high, interest rate rises are possible with increased costs for materials and personnel a further risk.
- If house prices are dropping, land values are likely to drop quicker.
- The government competition watchdog launched another investigation into the sector, while still investigating the misselling of leaseholds from several years ago.
Sector positives
- It’s anticipated that a new government support package for the new-build housing market will be released prior to year-end (this may also cover existing housing stock however).
- Appears to be a general uptick in demand with cancellations levelling off.
- The UK’s housing shortage is helping to support profits as too many buyers are chasing a limited housing stock. Perhaps some pent-up demand will be released when confidence returns?
- Inflation is expected to drop heavily, meaning a decrease in interest rates could follow.
- Property website Zoopla has stated recently that new sales agreed have surged as buyer confidence has improved.
Conclusion
From all of the above, it seems like the fate of all of these companies will be determined by inflation and the subsequent interest rates. There is always demand for housing as there simply aren’t enough being built and while this may be corrected in the longer term there is not much else restricting a return to growth. People either need to rent or purchase a house, and renting is often more expensive than paying a mortgage each month and higher interest rates impact both either way.
It is very likely that inflation will fall and will fall quickly, interest rates will follow and then confidence will return so I will certainly be buying one of these companies. At present, I have no shares in this sector and now seems like a good time to buy in. I am leaning towards Taylor Wimpey as they have a good dividend, they’re covering this better than most of their peers, their book value and low current P/E both indicate good value and they have low debt and high cash reserves. Therefore even if inflation remains higher for longer they should be able to ride out the storm, perhaps better than the other companies above in my opinion
Since the above tables and research were carried out the share price of Taylor Wimpey hasn’t moved much, and currently sits at £1.15, I will add these to my portfolio and will keep an eye on the whole sector and will likely be buying more of these companies going forward.