Is Now The Right Time To Buy Balfour Beatty plc?

Balfour Beatty (LSE: BBY) said this morning that it has cancelled its planned £200m share buyback and will be reviewing its dividend policy in March, when it’s full year results are out.

The decisions were made following an independent review by accountants KPMG of Balfour’s UK construction business, which recommended that Balfour’s 2014 profits be reduced by a further £70m.

It wasn’t all bad news, however. Balfour announced that the Directors’ valuation of its investment property portfolio has risen from £1,051m last June to £1,300m. The firm said that this new valuation was consistent with an independent valuation undertaken by KPMG.

Fresh start

Overall, today’s trading update was a mixed bag. I suspect this was a deliberate attempt by the firm’s new chief executive, Leo Quinn, to establish a fresh baseline from which his performance will be measured.

Shareholders may be surprised by the cancellation of the promised £200m share buyback, but today’s update makes it clear that this was necessary: Balfour had net cash of just £180m at the end of 2014.

Had the firm stuck with its buyback plan, it would have had to borrow additional money to fund the share repurchases — completely inappropriate given the group’s current problems.

Dividend blues

News that Balfour’s dividend has been placed under review should come as no surprise.

Last year’s 14.1p payout was uncovered by earnings, and consensus forecasts have been suggesting a cut for some time. The latest forecasts suggest the payout could be cut by 50% to 7.3p for 2014, giving a prospective yield of around 3.5%.

Is now the time to buy?

Although Balfour shares saw heavy trading when markets opened today, Balfour’s share price has remained surprisingly stable. As I write, the shares are actually up 1%, at 207.7p.

In my view this suggests that the news in today’s announcement was broadly as expected, and that investors are prepared to back Mr Quinn in his plans to turnaround Balfour’s struggling UK construction business.

It’s also worth noting that Balfour’s current market capitalisation of £1,400m is almost entirely covered by the £1,300m valuation of its property portfolio. This limits the downside risk of buying at today’s price and suggests that decent gains could be possible if the construction business can be successfully rejuvenated.

In my view, now could be a good time to buy into Balfour Beatty.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.