The UK housing market faces a decidedly uncertain future. Brexit talks are about to start and following a period of uncertainty, things could realistically get worse. Inflation has risen to 2.3% and with consumer confidence already weak, demand for mortgages could come under pressure. This may cause the profitability of housebuilders such as Bellway (LSE: BWY) to do likewise, which makes now a key period for the business.
Improving performance
Of course, Bellway’s first-half results release on Tuesday showed that the company is making encouraging progress. Its revenue moved 5.9% higher to £1,148.5m, while investment in becoming more efficient helped its operating margin to climb 60 basis points. This contributed to earnings which were 10.2% higher on a per share basis. As such, the company appears to have made a very solid start to the year at a time when trading conditions have been challenging.
Perhaps a reason why Bellway has performed better than some of its industry peers is its ongoing focus on customer care. It should result in the company regaining its status as a five star housebuilder, which makes it one of only two national housebuilders expected to hold this status. This could provide the business with a competitive advantage in a tough marketplace. And with a forward order book which is 18% higher than it was last year, as well as expected rises in UK house prices over the remainder of the year, it seems to be in a strong position.
Investment potential
Bellway currently has a dividend yield of 3.9%, which is covered over three times by profit. This indicates that there is scope for a rapid rise in shareholder payouts in future years. Certainly, there is the potential of a weaker housing market in 2017. But with Bellway forecast to record a rise in its bottom line of 8% this year and 4% next year, its financial performance is likely to remain positive. And since it trades on a price-to-earnings (P/E) ratio of 8.5, it appears to have a sufficiently wide margin of safety to merit investment.
Of course, other housebuilders also offer impressive investment potential. For example, Taylor Wimpey (LSE: TW) has a dividend yield of 7%. Since its shareholder payouts are covered 1.4 times by profit, there may not be the prospect of rapid dividend growth in future. However, a yield which is over 3% greater than Bellway’s could make Taylor Wimpey the superior income option. With Taylor Wimpey trading on a P/E ratio of 10, its shares perhaps offer a narrower margin of safety than their sector peer. However, with growth forecasts of 6% this year and 7% next year, they match those of Bellway.
Overall, both stocks appear to have strong value, growth and income potential. However, given inflation’s continued rise to 2.3%, a 7% yield from Taylor Wimpey could become increasingly attractive and rare. This may contribute to superior returns over Bellway in 2017.
