Hobson: Housebuilders a Good Bet Despite Volatility

THE WEEK: Morningstar columnist Rodney Hobson looks beyond the inconsistent share price performance of listed housebuilders

Rodney Hobson 8 September, 2017 | 12:12PM
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Bovis Homes

What is it about results from Barratt Developments (BDEV) that so often cause its shares to fall sharply? Certainly not bad news, which we have not had from the housebuilder for best part of 10 years. Nor is it warning noises from the rest of the sector.

The 4.6% drop in the share price that immediately followed full-year results this week was utterly baffling.  Pre-tax profits were up 12% in the year to June 30 as it built more homes than any year since the crash of 2008. The good news is that it is building more houses itself and fewer through joint ventures, which means all the profit goes to Barratt.

There will be further, albeit modest growth in building, in the current year but given that reservations are 13.8% higher than a year ago this caveat may prove to be overcautious. The dividend total is raised by 39% to 17.1p and there is a special dividend of 17.3p on top.

Berkeley (BKG) shares fell less on the same day despite the rival company posting an update that was OK but nothing like as positive, and Berkeley had the additional embarrassment of facing an AGM revolt against excessive executive pay. Bovis (BVS) saw its shares shoot up 7%, again on an update that was reassuring rather than exciting.

I still like housebuilding as a sector, despite growing concerns over a shortage of skilled labour in trades such as bricklaying, carpentry and plumbing. The recovery has further to go and, as I have said many times in this column, demand outstrips supply, particularly though not exclusively in the south east of England.

Figures from Redrow (RDW) were even better than those from Barratt, with profits up 26% as more homes were sold at higher average prices. The dividend total jumps from 10p to 17p and net debt has been almost chopped in half. The outlook is equally rosy, as the new financial year has begun with record order books.

Redrow shares immediately jumped 5% despite the fact that they have had just as good a recent run as Barratt. I can’t see any rational reason why there as such a discrepancy in the reactions.

Shares in housebuilders are no longer cheap but the growth in profits and dividends justifies the improvement. Every portfolio should have at least one housebuilder, although I have perhaps gone overboard with stakes in Barratt, Bovis and Taylor Wimpey (TW.). Events this week showed that buying opportunities can still occur even if you have to be pretty nifty getting in while the chance lasts.

Unsporting Behaviour

If you want to know why I never invest in companies with a majority owner, take a look at Sports Direct (SPD). Chief executive Mike Ashley has overturned a vote he doesn’t like. In fact, he’s gone one better and forced three votes to eventually get his own way.

Thus the men who should exercise some control over him but don’t, chairman Keith Hellawell and senior independent director Simon Bentley, were re-elected by a majority of independent shareholders. That the vote was close is of no concern to Ashley, who seems to take delight in being regarded as a bogeyman. Why should he care when he owns 60% of the company?

I actually have a grudging jealousy, for I wish my skin was as thick as his. However, in business you make life a little harder each time you get people’s backs up. You can’t beat him, so don’t join him. Stay well clear of the shares unless you enjoy life as a doormat.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barratt Developments PLC488.90 GBX-2.26Rating
Berkeley Group Holdings (The) PLC5,030.00 GBX-0.79Rating
Frasers Group PLC848.50 GBX-1.05
Redrow PLC687.50 GBX-1.36
Taylor Wimpey PLC148.30 GBX-0.87Rating
Vistry Group PLC1,214.00 GBX-2.18

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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