Is dirt-cheap dividend stock Bellway plc about to go into reverse?

The UK housing market faces a decidedly uncertain future. Brexit talks are about to start and following a period of uncertainty, things could realistically get worse. Inflation has risen to 2.3% and with consumer confidence already weak, demand for mortgages could come under pressure. This may cause the profitability of housebuilders such as Bellway (LSE: BWY) to do likewise, which makes now a key period for the business.

Improving performance

Of course, Bellway’s first-half results release on Tuesday showed that the company is making encouraging progress. Its revenue moved 5.9% higher to £1,148.5m, while investment in becoming more efficient helped its operating margin to climb 60 basis points. This contributed to earnings which were 10.2% higher on a per share basis. As such, the company appears to have made a very solid start to the year at a time when trading conditions have been challenging.

Perhaps a reason why Bellway has performed better than some of its industry peers is its ongoing focus on customer care. It should result in the company regaining its status as a five star housebuilder, which makes it one of only two national housebuilders expected to hold this status. This could provide the business with a competitive advantage in a tough marketplace. And with a forward order book which is 18% higher than it was last year, as well as expected rises in UK house prices over the remainder of the year, it seems to be in a strong position.

Investment potential

Bellway currently has a dividend yield of 3.9%, which is covered over three times by profit. This indicates that there is scope for a rapid rise in shareholder payouts in future years. Certainly, there is the potential of a weaker housing market in 2017. But with Bellway forecast to record a rise in its bottom line of 8% this year and 4% next year, its financial performance is likely to remain positive. And since it trades on a price-to-earnings (P/E) ratio of 8.5, it appears to have a sufficiently wide margin of safety to merit investment.

Of course, other housebuilders also offer impressive investment potential. For example, Taylor Wimpey (LSE: TW) has a dividend yield of 7%. Since its shareholder payouts are covered 1.4 times by profit, there may not be the prospect of rapid dividend growth in future. However, a yield which is over 3% greater than Bellway’s could make Taylor Wimpey the superior income option. With Taylor Wimpey trading on a P/E ratio of 10, its shares perhaps offer a narrower margin of safety than their sector peer. However, with growth forecasts of 6% this year and 7% next year, they match those of Bellway.

Overall, both stocks appear to have strong value, growth and income potential. However, given inflation’s continued rise to 2.3%, a 7% yield from Taylor Wimpey could become increasingly attractive and rare. This may contribute to superior returns over Bellway in 2017.

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Peter Stephens owns shares of Taylor Wimpey. 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.