Is it time to sell the housebuilders' shares after Redrow plc's chairman jumps ship?

House building site
House building site

Shares in Redrow(LSE: RDW) are sliding this morning after the company announced that its chairman and founder Steve Morgan, who founded Redrow in 1974, has sold a 7% interest in the housebuilder.

The sale was through Morgan's charitable trust, The Steve Morgan Foundation, and Bridgemere Securities.

Questions are being asked

This has raised some questions for investors. Since the financial crisis, shares in Redrow have been on a record run adding nearly 300% over the past five years excluding dividends. Shares in other housebuilders have chalked up similar returns.

Following this tremendous rise, in September Morgan announced his decision to step back from a full-time executive to a non-executive role. While he has said that he will continue to contribute to Redrow's business strategy, City analysts are concerned that the group might struggle without its founder in the captain's chair.

Today's share sale has only reinforced these views. Indeed, analysts at investment bank UBS believe that the deal "could raise the question on whether Mr Morgan will ultimately sell his entire stake in the company, and whether Redrow will be able to continue to grow successfully without Mr Morgan's leadership."

Time to sell?

Management buying and selling shares in their own companies can be a telling sign, and should not be ignored by investors. A 7% sale should certainly not be overlooked.

Redrow reported its results for the fiscal year ending 30 June last week. While pre-tax profit rose 26% to £315m management warned that key issues "need to be addressed by the government to support future growth," including the status of European Union workers after Brexit and plans for the Help to Buy scheme. These are questions the entire homebuilding sector now faces, and Morgan's decision to sell could be a signal that he sees stormy times ahead for the industry.

Still, City analysts don't see any problems for the company in the near term with earnings per share expected to rise 9% for the year ending 30 June 2018. Based on these figures, shares in the company trade at a forward P/E of 8.2 and offer a dividend yield of 3.3%.

A better buy?

Sector peer Bellway(LSE: BWY) is expected to grow faster than Redrow. City analysts have pencilled in earnings per share growth of 14% for the fiscal year ending 31 July 2017, followed by growth of 8% for the following fiscal period.

Based on these estimates, shares in the company are trading at a forward P/E of 8.1 for fiscal 2018. Bellway also appears to be the better buy from an income perspective. The shares support a dividend yield of 3.8%. The payout is covered three times by earnings per share.

And considering the share sale by Redrow's founder, it looks as if Bellway might be the better buy for investors. Not only is the company set to grow faster, but it may also be able to weather any market headwinds better. Bellway's average selling price is £260,000, below Redrow's £309,800, so if sales of higher-priced homes start to slow, Redrow will feel the brunt of the impact, while Bellway should be able to continue to push ahead.

Following management

Dealing by company insiders can be a strong signal to investors, a message which some shareholders fail to grasp.

Failing to understand what buying or selling means for your investment is just one of the biggest mistakes investors make. So, to help you avoid making this error, and others, we've put together this free report entitled The Worst Mistakes Investors Make.

By being aware of these mistakes, hopefully, you will be able to avoid repeating them. Click here to get your copy today.

Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has recommended Redrow. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

///>

Advertisement