The FTSE 100 can be a tricky place for investors to chart a course. There is no shortage of cheap stocks — by which I mean shares whose price falls inside the widely-considered value terrain of 15 times or below — but some of them are risk-laden basket cases just waiting to decimate your investment portfolio.
That said, there are plenty of bona fide, beautiful bargains that I reckon should deliver exceptional long-term returns, like London’s listed housebuilders.
Build a fortune
Only a fool would suggest that conditions in the UK housebuilding market haven’t changed considerably since the Brexit referendum smacked house sales, allied with changing legislation which has decimated demand from buy-to-let landlords.
But there remain plenty of reasons to expect the Footsie’s listed construction giants to deliver brilliant profits growth in the years ahead. And I’ve put my money where my mouth is, what with splashing out on Barratt Developments and Taylor Wimpey in recent times.
Investor appetite for the property builders has disappointed in 2018 following the blockbuster share advances of last year. However, the outlook for these firms remains strong thanks to the meagre housing stock that is propelling demand for new-build places.
And this is evidenced in the steady, (mostly) robust stream of financial updates since the turn of the year. This month Barratt paid testament to its “healthy forward order book;” Persimmon reported “healthy trading” that saw “total enquiry levels running circa 6% ahead of the prior year;” and in April Taylor Wimpey described the “solid consumer demand [that] continues to drive a healthy sales rate.”
The going has been harder for The Berkeley Group due to its significant exposure to the suppressed London market, a region where buyer activity could continue to suffer in the near-term as the Brexit saga drags on. Still, the long-term outlook in the capital and in the surrounding areas remains solid as government’s lack of a detailed homebuilding strategy means that supply is likely to continue lagging demand in the years ahead.
At any rate, Berkeley Group’s current valuation, like those of its FTSE 100 rivals mentioned above, factors-in the chances of this current disruption to sales activity persisting for a little longer than the City currently envisages.
Indeed, all four companies carry forward P/E ratios below the widely-regarded bargain benchmark of 10 times, leading with Barratt which carries a rock-bottom multiple of 8 times.
What has really attracted me to these housebuilders, however, is the prospect of plump dividends continuing to be shelled out, during the medium term at least.
Each one of Barratt, Taylor Wimpey and Persimmon carry prospective yields more than double that of the big-cap average. These stand at 8.5%, 8.7% and 9.5% respectively. And with earnings expected to continue heading north at all three businesses over the coming period, and cash generation remaining extremely strong as well, I reckon the builders are in great shape to meet current dividend projections from the City.
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Royston Wild owns shares in Taylor Wimpey and Barratt Developments. 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.