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A cheap FTSE 250 dividend growth stock that I’d buy and never sell

Frequent readers of my articles will know my bullish view on the British housing market. Those looking to tap into this sector have plenty of companies across the FTSE 100 and FTSE 250 to pick from, and this article looks at one of the big yielders on one of London’s second-tier index which I’ve long been a champion of, Redrow (LSE: RDW).

Homebuyer demand may not be as robust nowadays as political and economic uncertainty in the country reigns, and this is reflected in City estimates that Redrow will post 3% earnings growth in the year to June 2019 versus the double-digit-percentage increases it has been accustomed to generating up until now.

Still, estimates of extra profits growth still supports predictions that dividends should keep perching at generous levels, the number crunchers forecasting a full-year payout of 28.7p per share. This means the yield stands at a delicious 4.8%.

Record profits

There’s certainly no reason to expect profits or dividend growth to grind to a halt, and certainly so in the wake of Redrow’s full-year results of last week. It advised that revenues boomed 16% to £1.92bn last year, thanks to a higher number of completions and improved selling prices, an achievement that also pushed pre-tax profit to a record peak of £380m, up 21% year-on-year.

The result prompted Redrow to lift the total dividend to 28p last week, up a mammoth 65% from the prior 12-month period. And it’s no surprise the FTSE 250 firm had the confidence to give the shareholder payments a shot in the arm — its order book stood at an all-time high of £1.14m as of June, up £110m from the corresponding point in 2017.

Chairman Steve Morgan commented that “despite the uncertainty surrounding Brexit, demand for new homes continues to be robust, and overall house price inflation has moderated to a sustainable 2%.” He added that “mortgage availability is excellent, and with low interest rates by historic levels, the mortgage market remains very competitive.” He also lauded the positive impact of the government’s Help To Buy purchase scheme that helps first-time buyers get onto the property ladder.

Although Redrow has called for more clarity on Help To Buy, its commitment to boosting build rates suggests that it expects trading conditions to remain favourable for the industry for some time yet. The business added another 7,455 plots to its land bank in fiscal 2018, and last week affirmed that it is “committed to growing our output to help the country’s requirement to increase the number of new homes built.”

Redrow clearly isn’t without its share of risk. But I reckon that its rock-bottom valuation, a forward P/E ratio of 6.8 times, more than prices-in the current uncertainty surrounding the future of Help To Buy. In fact, I think the construction colossus is a brilliant share to buy today given the prospect of sustained earnings, and thus dividend, growth.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. 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.