2 FTSE 250 dividend stocks that could help you beat the FTSE 100
What’s next for housebuilders and the UK housing market? If you believe Steve Morgan, chairman and founder of FTSE 250 housebuilder Redrow (LSE: RDW), the answer depends on the government.
Mr Morgan says that uncertainty over Brexit and the expected end of the Help to Buy scheme in 2020 are damaging market sentiment.
The good news for shareholders is that these risk factors have not yet affected Redrow’s performance. The group’s revenue rose by 16% to £1.92bn last year, while pre-tax profit was 21% higher at £380m. Redrow’s operating profit margin edged up from 19.4% to 19.9%.
This growth was made possible by a mix of higher sale volumes and higher prices. Housing completions rose by 9% to 5,913 units, while the group’s average selling price climbed 7% to £332,300.
Shareholders will be rewarded with a 65% increase in the full-year dividend, which will rise to 28p.
A flat share price
Redrow’s share price has risen by 136% over the last five years, dwarfing the FTSE 100’s 13% gain over the same period. But the shares barely moved when the firm’s results were published on Tuesday, despite such a strong showing.
I can understand why. The problem facing the firm and its rivals is that its exceptional profits are heavily dependent on the Help to Buy scheme, which was used in almost 40% of the group’s 4,500 private sales last year.
My view is this scheme — which provides a cheap 20% loan to new home buyers — has inflated house prices, rather than making them more affordable. Recent press reports suggest that this view is gaining traction among ministers, raising the risk that the scheme’s 2020 end date won’t be extended.
A buy for housing bulls?
Redrow shares trade on 6.3 times 2019 forecast earnings, with a prospective yield of 5.1%.
For housing bulls, I believe this is one of the better bets in this sector. However, I’m no longer confident that the shares look like a market-beating investment.
Joinery profits
One housing-related company that’s hammered the FTSE 100 over the last five years is Howden Joinery Group (LSE: HWDN). This firm supplies kitchens to the trade through a network of depots across the UK. Its share price has risen by 69% since September 2013, compared to a gain of 13% for the FTSE 100.
This company’s innovative business model allows depot managers a high level of independence, so that they can build a strong local customer base.
It’s a strategy that seems to have worked well. Howden generated a return on capital employed (ROCE) of 40.7% last year. This means that for every £1,000 invested in the business, the group generated £407 of operating profit.
A quality stock to buy today?
When I’m looking for high-quality businesses, I generally target a ROCE of more than 15%. Howden’s performance suggests its shares deserve a premium valuation. Interestingly, they’re not that expensive, with a 2018 forecast P/E of 15.1 and a prospective yield of 2.5%.
The company’s recent half-year results showed that like-for-like sales rose by 10.7% during the first half of the year. Pre-tax profit was about 5% higher, at £68.8m.
Although there’s obviously a risk that a post-Brexit recession would hit demand for new kitchens, trading so far this year seems pretty strong. I’d be more comfortable investing in Howden Joinery than Redrow. Indeed, I rate this kitchen fitter as a potential buy.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group and 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.
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