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Why Telford Homes plc could be a better income stock than Royal Dutch Shell plc

Image: Royal Dutch Shell. Fair use.

Another day, another positive trading update from Britain’s housing sector. On Wednesday it was the turn of Telford Homes (LSE: TEF) to get in on the act. The company — which focuses on the non-prime market in the capital — advised that it expects to report record profits and revenues for the year ended March 2017.

City forecasters currently estimate pre-tax profits of around £33m for the last period, a figure the construction ace expects to have surpassed. Telford Homes added that it remains “on track” to see profit before tax rise to £40m and £50m in fiscal 2018 and 2019.

And Telford Homes retains a bullish outlook on the housing market, commenting that “the lack of supply of new homes compared to demand in non-prime London continues to present an opportunity for the Board to further their plans to grow output over the coming years.”

The Hertfordshire firm sees room for further opportunity from the build-to-rent sub-segment in particular, an area where the business currently boasts a pipeline comprising 483 homes with a combined contract value of £232m.

Perky projections

The City certainly expects Telford Homes’ bottom line to keep on swelling as the UK housing sector’s gaping supply/demand imbalance persists — the builder is expected to enjoy eye-popping growth of 35% and 18% in fiscal 2018 and 2019 respectively.

And this promising outlook is expected to keep propelling dividends skywards. The number crunchers expect an estimated 15.7p reward for 2017 to jump to 16.1p and 19p in the following two periods.

These prospective payments yield a market-storming 4.4% and 5.2% respectively.

Meanwhile, the hot earnings picture at Telford Homes leaves these projections pretty well covered, too. Predicted rewards are covered three times through to the close of 2019, comfortably above the benchmark of two times indicative of robust coverage.

Pipe dreams?

I am much less enamoured by the dividend prospects of Royal Dutch Shell (LSE: RDSB) however, as a steady rise in global oil supply threatens to push crude values to the downside once again.

The driller has managed to hurdle an environment of low crude prices in recent years through an ambitious programme of cost-cutting and asset-shedding. Just today it was announced that DCC is set to buy Shell’s liquefied petroleum gas (LPG) business in Hong Kong and Macau for £120m in the latest round of sales.

However, a resurgent US shale sector, allied with production ramp-ups by other major producing nations like Canada and Brazil, causes me to question City predictions that earnings can build on 2016’s bounceback into earnings growth — expansion of 207% and 27% is anticipated for 2017 and 2018.

City analysts also expect Shell to keep the dividend on hold through to the close of 2018 at 188 US cents per share, a figure that yields an impressive 6.7%.

But I reckon poor dividend cover (this year’s predicted payment actually exceeds anticipated earnings), combined with the cash-intensive nature of Shell’s operations and the shaky long-term outlook for oil prices, should encourage dividend chasers to think twice before investing.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. 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.