Can Berkeley Group Holdings and this 10% FTSE 100 income stock afford their towering dividends?
These are tricky times for house-builders as rising interest rates, Brexit and the future of Help to Buy spread uncertainty. Given its exposure to the softening London housing market, Berkeley Group Holdings (LSE: BKG) is right in the firing line, but its stock crept up today after it assured investors that profits were still on track.
On guidance
The board reaffirmed its guidance to deliver at least £3.375bn of pre-tax profits for the five-year period from 1 May 2016 to 30 April 2021, with at least £1.575bn for the two years ending 30 April 2019.
London and the South East are holding firm, it said, and “pricing has remained robust as there is demand for good quality, well located homes.” However, it also noted that London is constrained by “high transaction costs, restrictive income multiple limits on mortgage borrowing and prevailing economic uncertainty, accentuated by Brexit”.
Uncertain outlook
The £4.66bn FTSE 100 stock continues to reward investors with dividends and buybacks, announcing its next six-monthly return of £139.2m, or £1.06 per share, to be made by 31 March 2019. It currently offers a generous forecast yield of 5.8%, covered 1.9 times. Temptingly, it trades at just nine times earnings, but investors remain nervous about the outlook.
After five years of double-digit returns ranging from 12% to 58%, City analysts are forecasting a sharp 32% drop in earnings per share (EPS) in the year to 30 April 2019, followed by another 14% the year after. Revenues are also forecast to decline, from £2.7bn in 2018 to £2.28bn in 2020.
Still, investors will be encouraged by its moves to acquire five new sites this year and the current yield and valuation look even more attractive when you see that it is underpinned by a net cash balance of £687.3m. It could well beat the FTSE 100.
Buying opportunity?
Fellow FTSE 100 house-builder Persimmon(LSE: PSN) is also battling against uncertain housing market sentiment, its stock down 17% in the last three months. The £7.46bn FTSE 100 company has been further hit by a shareholder rebellion against chief executive Jeff Fairburn’s £47m payday. This time last year it was Berkeley facing a rebellion over boardroom payouts totalling £92m, as it happens.
Persimmon’s latest half-yearly report saw a 13% increase in profit before tax to £516.3m, new home sales up 4% to 8,072, and the average selling price up 1% to £215,813. This is a high-margin business that actually increased its margins further, from 27.6% to 29.7%.
Income hero
One number really grabs investors when they look at Persimmon, and that’s its whopping forecast yield of 10%. Rupert Hargreaves runs the numbers here and reckons the company should still be good for it. Cover is thin at 1.2, but management has exceeded its pledges in the past, and the group also has a strong forward sales pipeline.
Again, it has posted consecutive years of double-digit EPS growth, ranging from 19% to 49% in the past five years, and although this is forecast to slow, it should remain positive at 7% this calendar year and 3% in 2019.
Much depends on what you think Brexit will bring. Remember how fast house-builders fell in June 2016? They could be first to rebound if some kind of deal is struck.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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