In normal, non-Covid-19 times, housebuilder shares can offer income investors some pretty spectacular dividends. As lockdowns ease, sales are returning. That means the conditions for housebuilders to pay those dividends are improving.
Times reports on 6 July that Chancellor Rishi Sunak is preparing to cut stamp duty in the autumn also saw UK housebuilder shares soar.
FTSE shares Redrow, Taylor Wimpey, Persimmon, and Barratt Homes (LSE:BDEV) each jumped more than 6.2% on the news.
Sunak will quadruple the existing tax threshold from £125,000 to £500,000, the Times reported. The temporary stamp duty holiday would stimulate the housing market by reducing costs for buyers.
So which FTSE 100 housebuilder shares just leapt to the top of my buy list?
There are too many troubles hanging over Persimmon for me to recommend it, to be honest. The previous CEO, Dave Jenkinson, only lasted 15 months at the helm, far too short for a FTSE 100 company of this size.
And Jenkinson came in off the back of a shareholder revolt over a £75m bonus for the man he replaced. There’s repeated trouble at the top here and that makes me too nervous. Then there’s the poor quality of its homes, lambasted as shoddy and possibly unsafe by a 2019 independent review. A cursory Google will reveal stunningly high levels of customer complaints, too.
Next in the list of housebuilder shares to consider is FTSE 250-listed Redrow. The Wales-headquartered company certainly isn’t in as poor straits as Persimmon. However, a 30 June trading statement said the group ended the financial year with £126m of debt, compared to £124m of net cash in 2019. Covid-19 had a “profound” impact, which is not surprising really, with forward sales expected to be “substantially” lower.
Turnover at Redrow fell to £1.34bn from £2.11bn last year, which will take time to scrape back.
Build quality reviews are mixed, too. I’d expect management to improve the company reputation before I’d make any investment.
That niggling net debt disqualifies it from my watchlist and in any case there are is one much better option for FTSE 100 housebuilder shares.
In a trading update on 6 July, Barratt Homes revealed completions had dropped by a third in lockdown, but orders were flying in. High customer interest since reopening sees the BDEV order book at 14,236 homes. That’s a value of £3.24bn, 19% ahead of the same period last year.
Pre-crash in February 2020, retail investors in housebuilder shares loved Barratt, with prices running as high as 878p. Today, even with the 7% Rishi bump, the share price is still 40% cheaper. On 25 March, Barratt CEO David Thomas followed many FTSE 100 shares by suspending the dividend. The 9.8p per share payout would have cost the company £100m.
Even without the dividend — which I think its safe to say will return — there is the backbone of a good business here. Net cash is £305m and the balance sheet looks strong.
Looking further ahead there’s cracking value and growth to be had. Forward price-to-earnings stands at just 10, which is well under the FTSE 100 average. Earnings per share are expected to grow at 9.1% in the next 12 months, and the share price hasn’t leapt too far ahead either.
With a P/E growth ratio of 1.2, I think there’s quality on offer in spades.
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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.