Over the past five years, shares in UK housebuilders have produced some of the best returns the market has to offer as they’ve benefitted from a buoyant housing market and economies of scale. Shares in Barratt Developments (LSE: BDEV), Persimmon plc (LSE: PSN), Bellway plc (LSE: BWY) and Taylor Wimpey (LSE: TW) have gained 438%, 330%, 262%, and 333%, respectively, excluding dividends since the start of 2011. Over the same period, the FTSE 100 has produced an extremely lacklustre return of 3.5%.
But what’s next for these construction giants? Is it too late for investors to jump on the bandwagon and benefit from the UK’s housing boom, or is there still time to buy Barratt, Persimmon, Bellway and Taylor Wimpey?
Cyclical market
The cyclical nature of the UK housing market has led to many investors being wary of the sector. In the property market, the good times rarely last for longer than a few years at a time. Often, a bust is usually only just around the corner. This is why Barratt’s shares currently only trade at a forward P/E of 10.3 despite the fact that the company’s earnings per share are expected to grow by 19% this year, and a further 10% in 2017.
Unfortunately, it’s not possible to tell exactly when the next market downturn will occur. the UK housing market remains undersupplied and this isn’t going to correct itself any time soon, implying that the UK housebuilders won’t run out of business in the near future.
What’s more, the financial crisis is still fresh in the memory of these housebuilders. As a result, the companies have kept balance sheets clean, debt is low, and they appear cash-rich. This means that while the housebuilders still operate in a cyclical market, they’re significantly more prepared to weather the downturn this time around. To some extent this preparation has reduced the risk here for investors. There’s no longer a risk that these firms will be liquidated if the housing market collapses, as they will still have cash on hand to fund day-to-day costs and ride out the market slump.
Invest with a long-term outlook
So, if you’re buying into the housebuilders with a long-term investment perspective, it may not be too late to buy. Valuations are low, and these companies are still growing earnings at a double-digit clip. They’re also returning a large chunk of their profits to investors.
Barratt’s shares are set to sport a dividend yield of 5.3% this year, rising to 6.6% next year. Persimmon’s shares trade at a forward PE of 11.3 and yield 5.4%. Bellway’s pre-tax profit has tripled over the past four years, and City analysts expect the company’s earnings per share to grow by 26% this year. The company’s shares are currently trading at a forward PE of 8.4 and support a yield of 3.9%. Lastly, shares in Taylor Wimpey currently trade at a forward PE of 10.3, earnings per share are set to increase by 16% this year, and the shares support a dividend yield of 6.2%.