Neil Woodford’s favourite housebuilder isn’t the only 6%+ yielder on offer today

G A Chester casts his eyes over two stocks with prospective dividend yields in excess of 6%.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Barratt Developments (LSE: BDEV) is the largest holding of several housbuilders in Neil Woodford’s portfolios. As of 31 December, it ranked at number six in his flagship Equity Income fund, with a weighting of 2.8%, and at number eight in his Income Focus fund, with a 2.9% weighting.

He built his stake in Barratt during 2017, as part of a broad repositioning of his funds to capture what he sees as “a contrarian opportunity that has emerged in domestic cyclical companies where valuations are too low and future growth expectations far too modest.”

During October, he sold his holding of mid-cap international insurer Lancashire (LSE: LRE) to further increase his stake in Barratt and a number of other UK-focused FTSE 100 stocks. I’m not convinced that selling Lancashire, which announced its annual results today, was a good move. At the same time, I reckon buying Barratt is fraught with danger.

Lots of positives

The UK’s largest housbuilder is set to release its interim results for the six months ended 31 December next Wednesday. They’re going to be good because the company told us in January that it had “delivered a strong performance in the first half.”

In the same update, Barratt pointed to a string of positive features for the business, including good mortgage availability, a supportive Government policy environment, attractive land opportunities and its “healthy forward order book.” And the board reiterated its commitment to pay a £175m special dividend for the year.

At a current share price of 550p (over 20% down from last year’s post-financial-crisis high of above 700p), Barratt trades on just 8.5 times forecast earnings, while the forecast dividend (ordinary plus special) gives a yield of 7.9%. What’s not to like?

Downside risk

I have several concerns. Housebuilders have enjoyed a terrific bull run since the financial crisis, but this a notoriously cyclical boom-and-bust industry. Housing fundamentals may look good currently and the earnings multiple and dividend yield may scream ‘bargain’ but things can change quickly and other metrics — price-to-book and margins — suggest we’re at or near the peak of the cycle.

And with government stimulus measures also at full throttle and rising scepticism about their effectiveness, I believe risk has turned very much to the downside. As such, I’m inclined to rate Barratt a ‘sell’.

Dealing with catastrophe

Insurance is also a cyclical business and as Lancashire’s results today revealed, 2017 was a bad year for catastrophe losses, with hurricanes and wildfires taking a heavy toll. The company posted a $71m loss compared with a $154m profit in 2016.

However, managing such extreme years is all part of the business. While a loss is never welcome, the company was pleased that its risk management model passed this “real-time ‘stress test’.” In fact, Lancashire is a consistently well-managed business and has returned almost all of its profits to investors via dividends since becoming a public company. The annualised total return over the past 10 years is an impressive 16%, compared with 6% for the FTSE 100.

There was no special dividend for 2017, with shareholders having to settle for the modest regular ordinary dividend of $0.15 (10.6p at current exchange rates). The shares are almost 7% down on the day at 610p but the City expects a rebound in earnings and dividends in 2018. The forward P/E is 13, the prospective yield is 6.2% and I rate the stock a ‘buy’.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »