FTSE 100 housebuilders are looking good value these days, with Brexit certainty offering share prices a healthy bump, while buy-to-let landlords are facing a little-known tax change that could throw their profits into disarray.
From 6 April 2020, HMRC will enforce a much stricter regime than the current 22-month payment schedule. Any buy-to-let landlord selling a property after this date that leads to a capital gains tax liability will now have to submit a one-off return to the taxman and pay the tax due within 30 days of the sale.
Instead of facing this extra stress, I’d capitalise on the growing strength of the UK housebuilding industry by buying these unappreciated FTSE 100 shares in my Stocks and Shares ISA.
Persimmon won’t feature here. The York-based FTSE 100 firm has come in for stinging criticism on the poor quality way it sets up its estates, with shops, pubs, and community facilities sometimes a 20-minute drive away, leaving residents isolated in their own homes. I’ll focus instead on two top-quality shares with the greatest momentum.
The balance sheet looks strong, it is producing lots of free cash flow and its dividend is approaching 4% with forecasts of 6% within the next 12 months.
Over the last five years, BDEV investors have seen a return of over 80% in the share price, and I think there is much more to come. The certainty that a Conservative election victory has brought to the market means the price has climbed 22% since December alone.
From 2018 to 2019, revenue fell slightly but profits increased from £835.5m to £909.8m, and earnings per share jumped from 66.5p to 73.2p. The price-to-earnings-growth ratio – a measure of how undervalued a share is when taking into account its future growth – sits at a useful 0.8. Anything over 1 is considered overvalued.
Interim results are due out in early February so now could be the last good chance to get the shares relatively cheaply.
A chart of the Taylor Wimpey (LSE:TW) share price since 2007 mimics BDEV very closely, albeit with slightly slower growth. TW shares offer an upfront dividend of 2.8%, which seems low, but there is a very positive balance sheet to consider.
Completions across 2019 were up by 5% and chief executive Peter Fedfern said his company’s order book was worth a record £2.17bn at the start of 2020.
I like Taylor Wimpey for a lot of reasons — average sale prices are rising, and a price-to-earnings ratio of just under 11 makes the shares very good value in my eyes — but the main one is its large £546m net cash position. FTSE 100 firms carrying too much debt can see their repayments quickly spiral out of control; that likely won’t happen here.
As Redfern noted in a 14 January trading update, TW “remains a very cash generative business” and plans are in place to return £610m to shareholders in dividends in 2020.
Full-year results are due on 26 February 2020 and I’d say a buy now ahead of what are expected to be strong figures makes a lot of sense.
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Tom Rodgers has no position in 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.