I’ve long been a champion of the housebuilders, and I remain ebullient over the long-term profits outlooks for these firms, thanks to Britain’s yawning homes shortage.
Simply put, the UK just cannot put up enough homes to meet demand. And this is likely to remain the case, despite any economic fluctuations that the Brexit saga may throw up, as low interest rates are here to stay, and intense competition among the mortgage lenders is likely to persist as well.
A way I chose to play this phenomenon was by electing to buy shares in two of the country’s biggest house-builders, Barratt Developments and Taylor Wimpey. But I also used some of my investment funds to buy into brick-maker Ibstock (LSE: IBST), a company which obviously stands to benefit from bubbly building rates.
Production problems
The FTSE 250 firm hasn’t exactly been the flavour of the month with share pickers more recently though. Its share price plummeted in July after it advised that, owing to production problems in recent months (and particularly in July) adjusted earnings would register in the region of between £121m and £125m for 2018.
Ibstock said that it is about to embark on “increased maintenance activity” over the next 12 months in order to meet lively brick demand going forwards, and thus suck up the impact of higher maintenance costs and lower volumes.
This is a disappointment rather than a legitimate reason to sell, however. As UBS recently noted, “market conditions… remain healthy, driven by an undersupplied brick market in the UK and growth in the new residential housing market.” The bank even speculated that Ibstock could recover this profits shortfall by hiking prices of its bricks in 2019.
6% yields!
Indeed, the bright market outlook was epitomised by the company’s August decision to light a fire under dividends.
The decision to raise the interim payout 15.4% year-on-year to 3p per share could be considered generous on its own. But Ibstock did not stop there and it elected to pay a special dividend of 6.5p too, a move it had tipped back in March on account of its “robust balance sheet and strong cash generation.”
Still, the size of this supplementary dividend took the City somewhat by surprise and so the number crunchers have been busy upping their full-year forecasts since then. A 14.5p per share total dividend is now envisaged, resulting in a jumbo 6% yield.
As my Foolish colleague Roland Head has recently commented, however, there is a strong possibility that the actual full-year dividend will surpass even these revised predictions. Ibstock’s strong balance sheet certainly gives reason to expect this to happen — adjusted free cash flow powered to £7.4m for the January-June period versus £400,000 a year earlier.
While City analysts are forecasting an 11% earnings drop in 2018, this is expected to prove a blip in its growth story rather than a reason for serious concern, thanks to the positive trading environment and Ibstock’s plans to supercharge production with the start-up of its Leicestershire facility later this year.
I’d happily hold my shares in Ibstock for the next 25 years. Indeed, a cheap forward P/E ratio of 12.8 times is tempting me to load up on some more.