If you want a sector that has provided great riches for investors since the financial crunch, look no further than the FTSE 100‘s housebuilders.
This week, Barratt Developments (LSE: BDEV) reported a 44.8% rise in pre-tax profit for the year to June, after its total completions count rose by 10.8% with an average selling price gain of 8.7%. The cash is rolling in, and the firm managed a cash return of 25.1p per share (including an ordinary dividend of 15.1p plus a special 10p), for a total yield of 3.8% on today’s 651p share price.
And that share price, well, it’s climbed by 74% in the past 12 months and has six-bagged over five years.
Big cash handouts
Persimmon (LSE: PSN) hasn’t managed quite the same share price rise, but it’s not far off — it’s up only 58% in a year, to 2,090p, and up five-fold in five years. But in the first half of the current year the company saw pre-tax profit rise by 31% with a 7% rise in completions and a 4% bump in average selling prices.
On top of that, Persimmon has handed back special cash payments of 75p per share in 2013, 70p in 2014, and 95p this year, pushing the total return closer to Barratt’s big sixer.
Finally, Bovis Homes (LSE: BVS) hasn’t actually come close to the other two in share price performance, but its 188% gain over five years to 1,084p is still something that would put most sectors to shame — the FTSE 100 has managed a pathetic 12% over the same period.
And Bovis has brought home double-digit EPS rises for years now, and though the first half this year brought a relatively modest 9% rise in pre-tax profit after completions rose by just 2.6%, selling prices were 10% higher.
After such magnificent share price gains, is the sector near the top and is it time to get out? I say a cautious No on both counts.
Growth forecasts
Bovis is forecast to grow its earnings by nearly 30% this year and more than 20% in 2016, putting the shares on P/E ratios of just 11 and 9 respectively (with the long-term FTSE 100 P/E around 14). Dividends, which should be very well covered, are expected to provide yields of 3.7% this year and 4.3% next.
Persimmon shares are slightly fuller valued on a multiple of just under 14 for this year, dropping to around 12.5, on EPS growth forecasts of 24% and 11%. But the expected dividends are higher, yielding 4.8% and 5.4%, as the firm’s cash return plans continue.
And at Barratt we’re looking at a mooted 16% rise in 2016, for a P/E of 12.5 and with a 4.7% dividend yield on the cards.
What are the risks?
Now, as with anything related to house prices, there’s certainly some cyclical risk with these three stocks, and there have been periods of low P/E valuations in the past. But the housing market seems to be stabilising, with predictions of rises of around 6% per year in the coming 12 months — and we’re in a period of improving economic outlook.
A rise in interest rates when it happens could slow house prices and hurt housebuilder shares too, but even if house prices remained static for a few years (which seems unlikely), the housebuilders still look to be on attractive valuations to me.