Shares in Taylor Wimpey (LSE: TW) rose by 13% last week after the housebuilder announced a big increase in profit and dividend forecasts.
Taylor Wimpey’s dividend is now expected to rise by 26% to 13.8p per share in 2017, giving a forecast yield for next year of 6.7%. The company said that “very positive” housing market conditions should mean that its operating profit margin can be maintained at 22% between 2016 and 2018. That’s well above the 20.3% generated in 2015.
More than 70% of this year’s planned completions were already sold by the end of April. City analysts expect the firm’s earnings to rise by 18% to 17.4p per share this year, putting the stock on a forecast P/E of 11.8.
Taylor Wimpey now plans to make total dividend payments of £1.3bn from 2016 to 2018. That’s 39.8p per share, or around 20% of the current share price.
On this basis, the shares look reasonably valued to me at current levels, although further gains could be limited as investors focus on yield.
Is US market a better bet?
Equipment hire firm Ashtead Group (LSE: AHT) is based in the UK, but does most of its business in the US, where it’s targeting a 15% market share for its Sunbelt business.
Ashtead’s share price rose by 10% last week. The firm didn’t release any new information, but broker forecasts have been steadily upgraded over the last few months. The shares now trade on 12 times forecast earnings for the year ended 30 April.
Earnings per share are expected to rise by a further 12% to 90p next year, putting Ashtead on a reasonable-looking forecast P/E of 10.7. A dividend yield of about 2% is on offer, but in my opinion investors do need to ask if this is the best choice in this sector.
Ashtead has taken on a lot of debt to fuel its rapid growth. In my view, the firm now needs to demonstrate that its new branches and acquisitions can generate improved margins and free cash flow for the business. Ashtead shares could rise further, but I’d suggest they’re priced about right at the moment.
A tasty takeover treat?
One of this year’s biggest fallers, Restaurant Group (LSE: RTN), rose by 21% last week after press reports suggested that private equity funds may be lining up a bid for the firm.
The firm hasn’t yet confirmed or denied these reports, and the shares have slipped back slightly this morning as a result. However, I believe that Restaurant’s attractive property portfolio and strong cash generation means that the group could be a good buy at current levels.
The Frankie & Benny’s chain of restaurants is the group’s main asset. Same-restaurant sales are expected to fall this year, perhaps because customer tastes are changing. However, a turnaround seems entirely possible and Restaurant is still expected to report earnings of 29p per share in 2016. This puts the stock on a forecast P/E of 12 with a prospective dividend yield of 4.6%.
In my view Restaurant group is a likely bid target, and looks good value even without a bid. Although the share price may fall back if no bid emerges, I rate the shares as a turnaround buy.
