There is no doubt about it — investors who saw the opportunity in the housebuilding sector as it started to recover have been richly rewarded. A brief glimpse at the below chart clearly shows the market-trouncing performance, in terms of capital appreciation.
However, it doesn’t show the complete picture. In addition to significant paper gains made by those who bought into the recovery, there have also been huge amounts of cash returned to shareholders by way of regular dividends, indeed, both Persimmon (LSE: PSN) and Berkeley Group (LSE: BGK) have promised to return significant amounts to their shareholders, both announcing capital return plans that promised to return £6.20 and £13 respectively, that’s more than the 2012 market cap of the businesses. Indeed Persimmon has accelerated its plan by returning an additional 70 pence per share in 2014.
Not to be outdone, albeit slightly later, both Taylor Wimpy (LSE: TW) and Barratt Developments (LSE: BDEV) have announced their own capital return plan and special dividends, too. Daring to be different is Galliford Try (LSE: GFRD), who have increased the pay-out from 10.9 pence in 2009 to an expected 63 pence in for the year ending 30th June 2015.
Investors who bought into a basket of these house builders and had the patience to sit tight over the last three years can currently expect a growing yield of 15 – 20% on their initial investment — you won’t find rates like that in many places.
But What Does The Future Hold?
But as we know in the fickle world of investing, it isn’t all about a sparkling set of results, it’s all about the outlook.
Fortunately, but perhaps not unexpectedly, all of these house builders are reporting record, or at least, close to record trading. A number have cited the outcome of the general election as an influential factor, with house hunters now more certain of a favourable environment, particularly in London, where there had been the spectre of less favourable Labour and LibDem policies as the nation went to the polls.
Even the Bank of England has recently indicated that interest rates are not expected to rise until late in the first quarter of 2016. Personally, I believe this could well be pushed back further should the global economy enter another period of deflation, as has been muted by some economic commentators recently.
Are The Shares Cheap?
So with this basket of shares, forecast to yield around 5%, trading at an average forecast P/E of just under 13 times earnings, which is less than the market median of 14.4 times forecast earnings and yielding under 3% according to data from Stockopedia – At these prices shouldn’t investors be piling into these shares like there is no tomorrow?
Well, maybe, and maybe not. You see, it can be a dangerous game to value cyclical stocks on price to earnings metrics alone – after all, if this is the top of the market, then they will look superficially cheap. In order to keep their fingers from the buy button, investors, in my view should turn to the price to tangible book value. Here we see a range from 2.55 times book value to almost 4 times. To me that looks on the expensive side, even though these values are likely to rise going forward, at least for now. However, as the cycle turns, investors could well see the land banks being written down and the share price following suit.
The Foolish Bottom Line
So, to answer the question: Is it time to sell? Currently, I don’t think so. However, I’d be thinking carefully before buying into the housing building sector too heavily, despite the lure of the above average yield on offer.
