The last few years have been tricky ones for house-building stocks. Some house-builders have struggled, while others have managed to rally, but one thing that is the same across the sector is that valuations are undemanding.
Bucking the trend
One stock I’m particularly bullish on is Redrow (LSE: RDW). Although there are growing concerns about the slowdown in the housing market, this one appears to be bucking the trend by reporting strong revenues and high levels of interest.
The mid-cap house-builder may not be as well known as many of its larger rivals, but it has been one of the best performers in the sector in recent years. Against the headwinds affecting the market, Redrow continues to experience robust double-digit increases in revenues due to ongoing expansion in development capacity. This, combined with a widening of margins, which are largely attributed to steady growth in average selling prices, has translated to an even faster pace of growth in profits.
Dividends up 65%
In the year to 30 June 2018, Redrow’s earnings per share climbed 22% to 85.3p. And on the back of this, the company raised its full-year dividend by 65% to 28p per share, boosting its dividend yield to 4.7%.
With dividend cover of more than 3x and the balance sheet having moved into a net cash position of £63m this year, I believe further increases in the dividend seem likely going forward. Nonetheless, Redrow shares seem undervalued against its sector peers, as they trade at a forward P/E of just 6.7, compared to the sector average multiple of 8.1x.
A better buy?
Elsewhere, I reckon Tritax Big Box REIT (LSE: BBOX) is another stock to consider. The company, which buys and rents out ‘big box’ distribution centres, is expected to raise the dividend by 5%, from 6.4p per share last year to 6.7p.
And next year, on the back of development completions and its pipeline of acquisitions, Tritax is forecast to raise the dividend further, to 7p. As such, prospective yields clock in at a punchy 4.5% and 4.6% for this year and next, respectively.
Structural tailwinds
Underpinning the earnings and dividend growth are also long-term structural tailwinds. Amid changing dynamics in the logistics market and rapid e-commerce growth, demand for large-scale logistics property is set to continue trending upwards.
Other reasons for investing in such properties include the typical long lease terms, which offers greater stability and security, and lower costs of management. Tritax Big Box has a weighted average unexpired lease term of 14.1 years and an EPRA cost ratio of just 13.7%.
A prospective P/E multiple of 21.2 times for the upcoming fiscal period may seem uninviting, but this is a small price to pay given the long-term growth prospects. I believe quality clearly comes at a price in this case.
