For many, the coronavirus pandemic has heightened the appeal of owning your own home. The stock market crash hit housebuilders’ share prices hard, but the stamp duty holiday and Help to Buy schemes have encouraged buyers to move quickly.
Most housebuilders have reported a surge of customer interest since reopening in June. Share prices have been rising.
The two companies I’m going to look at today are my top picks from among the FTSE 100 housebuilders. I think both look attractive at current levels, offering a good mix of income and growth.
When combined with the tax shelter of a Stocks and Shares ISA, I think these FTSE 100 shares could be excellent investments.
Looks cheap: a recovery buy?
My first pick is Barratt Developments (LSE: BDEV). This £5.5bn group has lagged the index since the stock market crash and is down by about 28% so far this year, compared to 23% for the FTSE.
Barratt issued a solid set of results last week, reporting a pre-tax profit of £492m on the sale of 12,604 homes. That compares to £910m on 17,856 homes during the previous 12-month period.
Looking ahead, the company says new reservations have been ahead of the same period last year since the start of July. Forward sales stood at 15,660 in late August, with a combined value of £3,706.5m. That’s significantly ahead of the £3,307m value reported at the same point in August 2019.
What about the dividend?
Barratt shares trade at around 1.2 times their book value and on 11 times forecast earnings. I think they probably offer good value at current levels, but there are some reasons to be cautious.
The company is taking a cautious approach to the risk of further Covid-related disruption and hasn’t restarted dividend payments yet. When it does, these will be at a lower level than before — Barratt will aim to pay a dividend covered 2.5 times by earnings. My sums suggest that would give a yield of around 3.8% for the current year.
I expect the firm’s performance to recover steadily. If I’m right, Barratt shares should rise from current levels. I view the stock as a contrarian buy.
Forget the stock market crash: here’s a top performer
One housebuilder that hasn’t cut dividend payments this year is Berkeley Group Holdings (LSE: BKG). Shares in this London-focused developer have bounced back very strongly since the stock market crash. Berkeley’s share price is down by just 5% so far this this year, leaving it ahead of most rivals.
I think there’s a good reason why the market rates Berkeley so strongly. Founded by the late Tony Pidgley, this business has built a reputation for developing large, complex brownfield projects at the upper end of the market.
The firm’s latest trading update is a reminder of how resilient it is. Berkeley expects to report a pre-tax profit of £500m this year and says forward sales are running at about £1.8bn. Net cash stands at about £1bn, ahead of next week’s £134m dividend payment.
Berkeley shares currently trade on around 15 times forecast earnings, with a dividend yield of 4.3%. That’s not as cheap as Barratt but, in my view, this business is a class act which deserves a strong valuation. I’d be happy to buy Berkeley for a long-term ISA portfolio.
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Roland Head 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.