This Neil Woodford dividend stock could help you make a million

Roland Head flags up two UK-focused stocks that are performing strongly.

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Fund manager Neil Woodford’s positive view on the UK economy is at odds with the views held by some of his City rivals. But it’s not necessarily wrong.

One element of Mr Woodford’s contrarian stance is a commitment to housebuilders. At the end of October, his two income funds both included housebuilders Barratt Developments (LSE: BDEV) and Taylor Wimpey among their top 10 holdings.

Today I’m going to look at Barratt and a smaller rival, whose latest figures have received a positive reception from investors this morning.

London calling

Housebuilder Telford Homes (LSE: TEF) specialises in the “non-prime” London market. Its shares climbed as much as 4% this morning, after the company said it had secured more than 95% of gross profit for the current year.

Forward sales now total £580m, and the group confirmed that it expects to deliver pre-tax profit “in excess of £40m” for the year ending 31 March 2018.

Impressively, the group has already secured more than 65% of the gross profit needed to boost pre-tax profit by 20% to £50m in 2018/19.

The secret to Telford’s ongoing success in London appears to be its focus on building rental properties for institutional investors, rather than homes for owner-occupiers. Although the company says that individual open market sales “remain an important part of the business”, it didn’t launch any new developments to individual customers during the six months to 30 September.

The numbers look fine

One downside of focusing on build-to-rent is that profit margins are slightly lower than when selling to individuals. Telford’s gross margin on build-to-rent sales was 17.5% during the first half, compared to a gross margin on open market sales of 27.2%.

The mix of sales seen during the first half meant that the Waltham-based firm generated an operating margin of 11.5%, compared to 15%+ for rivals such as Barratt.

Despite this, Telford shares still look reasonably attractive to me, with a price/book value of 1.5 and a well-covered forecast yield of 4.2%.

A £313m bet

On 17 November, Barratt Developments notified the market that Woodford Funds now has a 5.07% stake in the firm. It’s a sizeable investment that equates to around £313m at current levels.

Why is Mr Woodford so keen? I suspect one reason is Barratt’s strong cash generation and 6.9% forecast yield.

The company’s completions rose by just 0.4% last year, but higher prices pushed revenue up by 9.8% to £4,650m. Operating margin rose to 17.2% and pre-tax profit was 12.1% higher, at £765m. As a result of this performance, the group’s net cash balance rose by 22% to £723.7m at the end of June.

Trading still seems to be strong — the Coalville-based firm recently said that forward sales totalled £2,876m on 12 November, 8.4% higher than at the same point last year. Broker earnings forecasts for 2018 have risen by 20% over the last year.

Would I buy?

I’m slightly uncomfortable about Barratt’s land-buying policy, which sees the firm buying an increasing amount of land with deferred payment. Buying land on credit will boost cash generation today, but could cause free cash flow to fall in the future.

However, apart from this concern, I see Barratt as an attractive play on the UK property market.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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