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Why I’d buy shares in this growing 4%-plus dividend yielder

What I like about house-builder and land developer MJ Gleeson (LSE: GLE) is that its focused business model is different from your average house-building firm, and that’s good for a few reasons.

The firm used to be a building, contracting and civil engineering beast but sold its contracting and civil engineering businesses between 2004 and 2010 to concentrate on development. I reckon a narrower approach to trading in one specialist area is almost always a good thing when it comes to business. That way it’s easier for a firm to develop expertise and efficiency at what it does, which often leads to greater profits.

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A buoyant market

These days, the company’s business earns money in two ways. Firstly, it builds homes for first-time buyers on brownfield sites within its Homes Division in the North of England. Secondly, the Strategic Land division buys options over land in the South of England in order to enhance the value of the sites by securing residential planning consents. It then sells to other builders and developers for a profit. Both divisions are making decent money.

I’m keen on the idea that Gleeson develops brownfield land rather than ripping up greenfield areas. I reckon more building firms should do that. Gleeson makes the strategy pay because brownfield land is cheaper. The company then builds affordable starter homes rather than chasing bigger profit margins by building larger houses.

Chief executive Jolyon Harrison pointed out in today’s report that the firm operates in “the fastest growing and most resilient part of the housing market.” Typically, people buying the firm’s houses are young, first-time buyers on low incomes moving from renting or from living with family. The wide availability of mortgages and government incentives supports the market, and it often works out cheaper for people to buy than to rent in today’s low-interest-rate environment.

The housing market is notoriously cyclical, but Mr Harrison explained that Gleeson’s strategy removes secondary market risk. People who already own a home can put off moving to another one if economic times are tough. However, Gleeson’s customers who buy for the first time will likely buy their first home when they arrive at the right age with less consideration of the wider economic picture. The firm estimates that around four million people rent homes in its target geography, which suggests that the potential for growth is large. Gleeson is the only listed house-builder dedicated to the starter home market and it sees high demand when it opens new sites.

Good figures and an agenda for growth

Revenue and earnings have been rising for several years and today’s figures sparkle too. Revenue came in 23% higher than last year, cash from operations moved 10% higher and earnings per share lifted 15%. The directors pushed up the total dividend for the year by a whopping 33%, reflecting the Group’s strong financial performance and our confidence in the prospects for the current year and beyond.”  Indeed, the company said it is on course to double sales to 2,000 units per year over the period 2017 to 2022.

With the share price near 718p, the forward dividend yield sits just over 4% for the trading year to June 2019, and the payment looks set to be covered almost twice by earnings. I think the stock is attractive.

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Kevin Godbold 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.

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