Picture a market with a strongly growing demand and a serious shortfall in supply, resulting in sales prices soaring ahead of inflation and ahead of earnings for years. Now imagine the shortage of supply is so bad that the government is starting to panic. Wouldn’t you like to be selling some of that?
I’m talking about the housing market, and some of the best shares in the sector can be had on P/Es of under 10. The madness that followed the Brexit vote forced shares down, but they’re already recovering, so these bargains might be gone soon.
Look at Redrow (LSE: RDW), whose shares are up 4% to 471p as I write, on the morning the firm released another record set of first-half results. The six months saw a 13% rise in legal completions, leading to 35% gains in both pre-tax profit and earnings per share, allowing the company to lift its interim dividend by 50%.
Redrow’s land bank grew by 18% to 25,300 plots, aided by the acquisition of Radleigh Homes in the East Midlands, which contributed 2,500 plots.
The company “entered the second half with a record order book“, and chairman Steve Morgan told us he has “every confidence this will be another year of significant progress for Redrow“.
The share price has now risen above its pre-referendum level, but we’re still looking at a P/E of under eight. Dividend yields are modest at around 3%, but they’re strongly progressive.
More price rises
The upbeat Redrow results have given Taylor Wimpey (LSE: TW) a boost today too, with the share price up 2% to 175p in morning trading. Earnings growth at the firm is expected to slow a little after the past few years of very big gains. But that would still put the shares on a P/E of only around 9.5 based on 2017 forecasts — and there’s a whopping 6.5% dividend yield expected for the year just ended, rising to 8% this year.
Results for 2016 are due on 28 February, and in its year-end trading update, chief executive Pete Redfern told us to expect profitability “at the upper end of market consensus“. Taylor Wimpey enjoys a bulging forward order book, a fully-stocked land bank, strong cash generation, and one of the best dividends in the FTSE 100.
My third pick of the sector is Persimmon (LSE: PSN), which also ticked up this morning — by 1.7% to 1,991p. That’s not quite above pre-referendum levels, but it’s very close.
We’re looking at another very low fundamental valuation here, with a P/E of under 10 on 2017 forecasts. Dividend yields at around 5.5% are lower than Taylor Wimpey’s, but they’re more strongly covered by earnings and still way above the market average.
Persimmon’s latest update revealed an 8% rise in revenues, with performance looking healthy across the board and a year-end cash balance of approximately £913m. Full-year results for 2016 will be with us on 27 February.
A million homes
The most recent government white paper on the UK’s housing shortage identified the need for 250,000 new homes per year, with a target of building 1m homes by 2020, and there are various schemes in the offing to make it easier for first-time buyers.
That has to mean good times for the nation’s housebuilders, and I see a good decade ahead for share prices.
A housing millionaire
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Redrow. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.