Balfour Beatty (LSE: BBY) dipped on Wednesday, losing 7% by the end of the day. The news? A reiteration of the FTSE 250 construction group’s positive 2021 outlook and a big hike to the interim dividend. Yes, six-month underlying profit from operations (PFO) of £60m (from a £14m loss the previous year) caused Balfour Beatty shares to fall.
It’s not unusual for such things to happen, and there was one negative note in the first-half headlines: “Construction Services negatively impacted by private sector property projects in central London.”
Other than that, the order book stood at £16.1bn, in line with the 2020 year-end level. And the half saw average net cash improve from £527m at 2020 full-year time, to £611m. And, the big news for someone like me who invests primarily for dividends, Balfour raised its interim payment by 43% (compared to 2019) to 3p per share.
That’s still only a modest yield, suggesting around 2% for the full year. But we’re looking at a recovery situation here after a big hit to 2020 earnings and dividends. And even that much, coupled with a positive balance sheet position, looks encouraging to me.
Balfour Beatty shares reaction
If the market’s reaction on the day of the results is disappointing, it does need to be seen in the wider context. The dip means that Balfour Beatty shares are now underperforming the FTSE 250 in 2021. Their year-to-date rise of 7.8% is less than half the index’s 16% gain. Before the latest figures were out, the relative positions were reversed with Balfour Beatty slightly ahead.
Still, the shares actually held up pretty well during the 2020 pandemic crash. The BBY price had been heading upwards prior to the start of the slump. And even its subsequent fall saw it remain ahead for most of the year. Today, the shares are up 37% over the past two years, while the FTSE 250 has grown by 23%. And the FTSE 100, well, that’s gone nowhere overall — though it went on a volatile ride while not getting anywhere.
But the big question is, would I buy BBY shares now? The tricky thing for me is valuation. The firm expects its “2021 PFO outlook for earnings-based businesses to be in line with 2019.” That’s seems a slightly obscure form of wording to me, and how it ends up relating to bottom-line full-year earnings for the group is hard to unravel.
Full-year valuation
But if EPS should come in around 2019 levels, we’d be looking at a P/E of approximately 15. And I don’t see that as at all stretching for a company heading into a recovery growth phase. On the downside, it’s a very competitive business with a great deal of pressure on margins. And these days I generally prefer companies with bigger margins that can pay me fatter dividends. A couple of percent from a sector with cyclical characteristics is not what I’m looking for right now.
Saying that, I do think BBY is possibly the best in the business. Certainly one of the best, at least. If I wanted into the construction sector, I’d probably buy Balfour Beatty shares.