Over the past few months and years, I’ve been a firm believer that UK housebuilders are worth buying-into. But shares tend not to go up in straight lines.
I was worried about the impact that the Brexit poll would have. Yet, if we analyse the economic data from the past few months, including the employment rate and GDP growth, Britain seems to have been sailing along completely unhindered by the vote so far. The consensus that this was a crisis that could cause a recession may just have been turned on its head.
Consider house prices. Instead of there being falls, the annual rate of house price inflation actually rose to 8.7% in June 2016, from 8.5% in May. Fears of a house price slump have proved to be entirely unfounded. So here are the three house builders I think are set to fly.
Immediately after the Brexit decision, shares in Barratt Developments (LSE:BDEV) took a tumble. Many argued at the time that the housing boom was over. But I think a more likely explanation is profit taking. After all, property stocks had been rising steadily since the Credit Crunch, and were due a correction. This is that correction. And that’s all, in my opinion.
Check the fundamentals, and you will see that this company stands on a trailing P/E ratio of just 10, with a dividend yield of 2.6%. That’s remarkably cheap. Earnings have soared from 7.5p in 2013 to 44.6p in 2015. Although this rate of growth is set to slow, I think there’s room for further share price appreciation. What’s more, Barratt is set to pay out more of its rising profits as dividends, which will appeal to income investors.
Persimmon (LSE:PSN) owns brands such as Charles Church and Westbury. It has strengths in premium properties, particularly in the South of England. And it has also seen rapid growth in profitability, with EPS progressing from 84p in 2013 to 166p in 2015. A surging share price means it has now overtaken Barratt Developments as Britain’s leading housebuilder.
Like Barratt, the share price has fallen recently after a bout of profit taking, but I think this has created a buying opportunity. Although no dividend was paid out last year, a trailing P/E ratio of 10 looks good value.
I would expect this company to start paying out a dividend soon, and as its programme of housebuilding continues unabated after the EU referendum, profitability and share price are likely to push further ahead.
The Taylor Wimpey (LSE:TW) share price currently stands at 154p, way below the 508p it reached during the property boom of 2007. Yet this is still a very strong residential developer that provides housing in the UK and Spain.
And profits have doubled in the past two years, with turnover increasing by more than 40%. Operating cash flow is an impressive £426m. Taylor Wimpey is on a trailing P/E ratio of 10, with a dividend yield of 1.1%.
These are healthy numbers, and are the reason why I think the recent share price pull-back has created a great opportunity to buy-in.
Prabhat Sakya 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.