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One turnaround stock I’d sell to buy this unloved 8.7% yielder

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The UK’s leading retirement housebuilder McCarthy & Stone plc (LSE: MCS) has really struggled to win over the market since its IPO in 2015. And I don’t believe that sentiment towards the firm is going to change anytime soon looking at today’s half-year figures. 

Today’s numbers show that while the company’s revenue is expected to be £240m for the half-year to 28 February, up slightly from last year’s £238m, thanks to a 14% increase in the average selling price. However during the period, the number of units completed dropped by 12%. Thanks to higher costs, margins and operating profit are expected to fall year-on-year. 

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Harsh environment 

McCarthy’s problems are a result of a subdued property market. While many home builders are benefiting from the government’s Help to Buy scheme and demand for new builds from first-time buyers, at the other end of the market conditions are reportedly more “subdued.” To help try and improve sales growth, McCarthy’s management has increased “usage of part exchange” deals and commissioned a new television advertising campaign to lure buyers. 

Unfortunately, the extra spending required by these two marketing initiatives is weighing on profits. Still, it seems management believes that the company can make a comeback in the second-half. Commenting on today’s figures, CEO Clive Fenton said: “Our forward order book is currently showing a 16% increase year-on-year and this gives us confidence in our expectation that the full year outturn will be within the current range of analyst forecasts for the full year.

However, following this upbeat statement, Fenton went on to caution that there remains “continuing uncertainty” surrounding the government’s position on ground rents, which are a vital income stream for the group. Around 4% of revenues came from related sales in 2016 and the total is expected to rise to £33m, or around 7% of revenues for 2018. 

Nevertheless, despite this uncertainty, City analysts are expecting the company to report earnings per share growth of 16% to 16p for 2018. Based on these forecasts, the shares are currently trading at a forward P/E of 7.8, which looks cheap. But if you’re looking for a cheap homebuilder, I believe Bovis Homes (LSE: BVS) is a better buy. 

Turnaround is well underway 

2017 was a bad year for Bovis after losing its boss following customer complaints about poor workmanship at some of its properties. These issues prompted a profit warning and the implementation of a turnaround plan. 

The good news is that 2018 is already looking like it will be a better year, with management targeting a “controlled increase in volume” of property output. Management is also working to recover the firm’s reputation with customers, and this seems to be working. As my Foolish colleague Peter Stephens pointed out a few days ago, Bovis is on track to recovering a 4-star rating from the House Builders Federation. 

City analysts are expecting Bovis to report a 28% rise in its bottom line for 2018, which should, they believe, support a 23% increase in the dividend payout to 98p per share. That gives a dividend yield of 8.7% — more than double the FTSE 100 average. With a net cash balance of £145m reported at the end of fiscal 2017, it certainly looks as if the group is financially secure enough to support this distribution.

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Rupert Hargreaves owns no share 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.

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