Shares in homebuilder Crest Nicholson (LSE: CRST) have lost around a third of their value over the past 12 months, underperforming the FTSE 100 by approximately 20% excluding dividends.
Investors have been selling because they are worried that, after several years of explosive earnings growth, Crest is heading for a prolonged slowdown. Indeed, management confirmed only yesterday that full-year 2018 pre-tax profit declined 15%, thanks to growing challenges in the London market. To cope with these challenges, management has taken “decisive action” to cut costs, slow its building programmes and run the business for cash.
Usually, I wouldn’t recommend a company with falling earnings as a dividend investment, but Crest’s decision to run the business for cash has grabbed my attention.
By focusing on cash generation rather than chasing growth in a weak property market, I believe Crest is making the right decision for its investors. You see, not only is the company facing weaker demand for its high-end properties, but costs are also increasing (operating margins declined from 20.3% in 2017 to 16.7% for 2018). So, if Crest continues on its current trajectory, these numbers tell me the group is only going to be selling fewer houses at a lower price with higher costs, which ultimately means lower profit margins and lower profits.
In this environment, conservatively running the business, maximising profits for investors and concentrating on cash generation, seems like the right thing to do. Under this strategy, City analysts are forecasting net cash will hit £85m in 2019, £103m in 2020 and £114m in 2021, that’s assuming the dividend is held steady at 33p per annum (a yield of just under 9% at the current price).
Not only do these figures show that the company should be able to maintain its current divided, but it implies there’s room for growth as well.
That’s why I think it could be worth buying Crest today before the rest of the market catches on to the opportunity.
The other undervalued FTSE 250 dividend stock that I think it is worth buying today is Crest’s peer, Bovis Homes (LSE: BVS).
Unlike Crest, Bovis hasn’t reported a slowdown in demand for its properties, primarily because the company concentrates on the more affordable end of the market, where the government’s Help to Buy scheme is still encouraging robust demand. After a healthy 2018 — management expects to report a profit ahead of City expectations — initial signs for 2019 are already “encouraging” according to the firm’s January trading update.
This is all great news for dividend investors, mainly because the enterprise is already flush with cash. At the halfway point, Bovis reported £43m of cash on its balance sheet, a number that I expect has risen substantially over the last six months as cash flows are historically second-half weighted.
As the group’s cash balance expands, the City is expecting the stock’s dividend yield to hit around 10% for the next two years. A modest valuation of just 9.6 times projected 2019 earnings only sweetens the appeal here in my opinion. What’s more, as my colleague Harvey Jones recently pointed out, the shares could be set for a strong bounce if we get a soft Brexit.
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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.