The housebuilding sector has enjoyed a period of stunning growth since the financial crisis. It has been supported by demand-side policies from the government, as well as a continued lack of supply.
This has meant that profitability and cash flow across the sector has soared. It has also allowed dividend payments to increase, with the major housebuilders in the FTSE 100 now offering some of the highest dividend yields in the index. It has also provided scope for a major improvement in balance sheets across the sector.
Looking ahead, further growth in dividends could be on the horizon. Large net cash positions plus a positive earnings outlook for the sector could lead to significant income prospects for investors in Persimmon (LON:PSN) and Taylor Wimpey (LON:TW.).
Improving financial standing
As mentioned, balance sheets across the sector have improved in recent years. Strong profit and cash flow growth has meant that Persimmon and Taylor Wimpey now have large net cash positions. In the case of Persimmon, it has net cash of £1.3 billion, while Taylor Wimpey has net cash of around £510 million.
Both of these figures suggest that the two companies have significant capacity to not only invest in future growth – for instance through additions to their already-swollen land banks – but to pay higher dividends. The two companies already have relatively generous income prospects, with Persimmon set to pay out 815p per share between now and mid-2021. Likewise, Taylor Wimpey has already committed to paying out 15.3p per share in 2018 in a combination of ordinary and special dividends.
These figures put the two stocks on dividend yields of over 8%. Clearly, there is no guarantee that the capital return plan will be followed as planned, or that special dividends will continue. However, the prospects for the housing market appear to be positive.
Government policy could be a key factor in the continued success of the sector. The Help to Buy scheme has helped first-time buyers onto the property market. However, it has also skewed the odds in favour of housebuilders, since the equity loan policy can only be accessed via new-builds. This has pushed demand for new properties higher. With an extension to Help to Buy being announced by Theresa May, the tailwind for the industry looks set to continue.
Low interest rates could also maintain a high level of mortgage availability. This could encourage greater demand, while restricted supply continues to create upward pressure. This situation could persist, since UK population growth is forecast to outstrip the number of houses that are built over the long run.
The upbeat prospects for the housebuilding industry mean that Persimmon and Taylor Wimpey may become increasingly confident about their financial future. Therefore, they may decide to increase their capital return programmes even further than expected in the next few years. With such large amounts of cash on their balance sheets and significant land banks already in place, returning it to investors may be deemed the most efficient use for it.
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