The UK housing market is under a lot of pressure. The high level of demand for new homes is underpinned by high employment, low interest rates, competitive mortgage deals and favourable government schemes, which is – although worrisome for some parts of the economy – helping to support housebuilders’ profits.
Taylor Wimpey stock's P/E ratio (TTM)
In addition, dividend yields are also some of the best in the FTSE 100, with recent annual results helping the UK’s top housebuilders by turnover – Persimmon, Taylor Wimpey and Barratt Developments – to offer yields of 10.2%, 9.2% and 8.21% respectively.
There are headwinds for the industry though, especially when political risk is so high due to Brexit. While government funding continues to energise homebuyer demand with policies such as the ‘Help to Buy’ scheme, should these be phased out, it could put pressure on the sector.
In addition, any prospect of higher interest rates would raise borrowing costs for potential home buyers. For the moment the Bank of England has however helped to ease that concern by announcing that rates would stay largely unchanged at 0.75% in 2019, to help stimulate the economy.
Franklin Templeton fund manager, Colin Morton, takes a “stoical” view on housebuilding in the UK and believes that a lot of the sector’s fears are overdone. “There is undoubtedly a shortage of appropriate housing in the UK. And any post-Brexit UK government will still need to address that shortage,” he told Citywire.
Three UK housebuilders – Taylor Wimpey, Persimmon and Barratt Developments – are benefiting particularly well from the housing crisis, with each posting record-breaking profit and signalling an upward path for the wider industry:
Taylor Wimpey aided by Help to Buy scheme
UK house builder, Taylor Wimpey had a busy 2018 thanks to low interest rates and the extension of the ‘Help to Buy’ scheme, which inflated sales by 36% alone. The company built 15,275 homes over the year and with an order book close to 10,000 homes, confidence is robust.
Taylor Wimpey posted a 2.9% rise in revenue to reach £4.08bn in 2018, with profit levels increasing 5.5% to £856m, giving it an annual return on equity of 21.5%.
“Despite ongoing macroeconomic and political uncertainty, we have made a very positive start to 2019 and are encouraged to see continued strong demand for our homes,” CEO Pete Redfern said.
The financial strength of the business and Taylor Wimpey’s confidence in the future has meant shareholders who enjoyed earnings per share of 20.1p in 2018 and £500m in dividends, are expected to see an increase from 0.65p to 15.3p per share this year.
Shares are up nearly 29% at 175p so far this year and while a rocky period could be endured in the short-term, a forward annual dividend yield of 4.17%, and a payout ratio of 24%, should help tide investors over.
Persimmon’s profit tops £1bn
The most impressive recent annual growth in the industry was achieved by Persimmon, which in 2018 became the first UK housebuilder to make more than £1bn in pre-tax profit, up 13% from £966m in 2017.
Despite the impressive performance, the shares are trading 8.6% below its 50-day moving average due to housing secretary James Brokenshire reviewing the housebuilder’s participation in the lucrative ‘Help to Buy’ scheme.
|PE ratio (TTM)
Operating margin (TTM)
Persimmon stock vitals, Yahoo finance, as at 26 March 2019
“Persimmon’s shares had become oversold, and recent updates from the business confirmed what we suspected about the housebuilding sector in general; earnings have continued to rise despite investors selling out,” Smith & Williamson Enterprise fund manager Mark Swain told Citywire.
The company’s stock does offer a tangible book value at 9.45 per share, which is well above the five-year average of 4.26, indicating that its inventory or the value of the land it has purchased to build on is in a healthy position.
Barratt delivers second highest number of homes
Barratt Developments, the UK’s largest housebuilder by sales, kept the upbeat momentum of strong financials among its industry peers when it posted a record pre-tax profit of £835m for the year ending 30 June 2018, an 8% year-on-year increase.
After an initial rally in September 2018 following the announcement, the stock went onto loose 18% across the last three months of 2018. This year has however seen a rebound, with gains of 30% in the first two months of the year. Momentum has gone onto stall in March, with a loss of 2% up to week ending 22 March.
Like its industry peers, Barratt has relied on the government’s ‘Help to Buy’ scheme for a significant proportion of its sales. As much as 38% of Barratt sales made use of the scheme in the six months to December, compared with 36% in the year to June 2018.
Proportion of Barratt sales that made use of the 'Help to Buy' scheme in H2 2018
The housebuilder now has an operating gross margin of 18.44%, which has helped it to offer shareholders £175m in special dividends in November this year, as well as another £175m payout in 2020.
“Including these special returns, the company is set to return more than 22% of its market cap in less than two years,” Woodford Investment Management manager Stephen Lamacraft said in a note to investors.
The company delivered 17,579 homes in 2018, the second highest amount in its 60-year history.
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