These two FTSE 250 firms have promised copious cash payouts to their shareholders.
The past five years have been pretty tough for British housebuilders. First, after peaking in the summer of 2007, house prices fell steeply throughout the UK, before bouncing back in the spring of 2009.
Second, the number of property transactions is running at half its peak. In 2006-07, nearly 1.9 million UK properties worth at least £40,000 changed hands, but this figure has been below one million for the past three years.
A big boost for Berkeley
With prices falling and fewer sales taking place, you'd expect housebuilders to have taken a battering during the downturn since 2007. While this is certainly the case for weaker firms, some of which went bust, the biggest and best have continued to build on their established success.
For example, take Berkeley Group Holdings (LSE: BKG), the FTSE 250 firm founded by Tony Pidgley, whom I dubbed the 'prophet of property'. In the late stages of the Noughties property boom, most housebuilders were splashing their cash on over-priced land. Meanwhile, Berkeley was selling off its plots and building up a cash war chest to cope with the downturn correctly predicted by Pidgeley.
This morning, Berkeley issued a trading update for the four months from 1 November 2011 to 29 February 2012. Thanks to its focus on London and the South East, demand for Berkeley's residential property has been 'resilient' and in line with market conditions during 2011.
Berkeley claims that the "current constrained supply of quality new homes" around London places a premium on its properties and "maintains sales at previously achieved levels". Despite the weak economy, Berkeley's 'robust' trading performance has boosted cash due on forward sales to over £1 billion, versus £813 million as at 1 May 2011.
Delicious dividends
Thanks to this flood of cash, Berkeley is selectively investing in land and new sites, spending £80 million in the period. Following this investment, Berkeley's net debt rose to £84 million, well below its credit line of £450 million.
Looking ahead, Berkeley expects to double its pre-tax profit to £220 million by April 2013, two years ahead of plan. In addition, it expects to add £3 billion to the value of its land bank by April 2015.
Thanks to its robust balance sheet and strong cash flow, Berkeley has laid plans to boost its shareholder returns through the payment of massive dividends. In fact, the firm intends to return £13 a share to its owners by September 2021, which adds up to £1.7 billion.
According to Berkeley's latest comments, the first dividend of £4.34 per share is scheduled to be paid no later than 30 September 2015. For this 10-year plan to succeed, Berkeley must make a consistent return on equity of at least 18.5%. It expects a pre-tax return on equity for 2011/12 of around 20.8%.
As I write, Berkeley shares change hands at 1,386p, down 8p, which values the group at nearly £1.9 billion. Thus, with almost its entire market value due to be paid out in cash dividends over the next decade, Berkeley trades on a premium price-to-earnings (P/E) ratio of 14.6. Clearly, I should have bought when I highly praised Berkeley in July 2010!
Persimmon pumps up its payout
Then again, Berkeley is not the only housebuilder to promise deep dividends to its owners. Only last month, Berkeley's main rival and market leader Persimmon (LSE: PSN) promised to return £1.9 billion to its shareholders. This windfall for Persimmon shareholders starts with a special dividend of 75p in June 2013, with 620p per share expected to be paid by 2021.
When this exciting news broke on 28 February, Persimmon's share price leapt by nearly 13% to 706.5p. As I write, it is 683p, which values the housebuilder at almost £2.1 billion. At this price, it trades on a forward P/E ratio of 15.1.
Show me the money
One of the criticisms often made of company directors is that they forget that they are mere managers and that it is shareholders who own these businesses. Perhaps the best way for directors to show that they understand this 'agency problem' is by maximising the cash returns to shareholders.
Both Berkeley and Persimmon intend to pay out the bulk of their current market values in dividends over the next decade. For me, this is a powerful demonstration of the confidence of their respective boards -- and of their current financial strength!
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