Here, I intend to discuss Crest Nicholson Holdings (LSE: CRST), another splendid income stock from the FTSE 250 I’d always buy over the Footsie-quoted banking colossus. Come take a look.

Big yields, stunning value

At current share prices, Crest Nicholson carries a gigantic dividend yield of 8.5% through to the close of 2020, a figure that blows Lloyds’ forward yield just above 5% clean out of the water.

This isn’t the only metric in which it beats the Black Horse bank either. The homebuilder’s prospective P/E ratio of 7.9 times beats Lloyds’ figure of around 8.2 times and makes it better value for money (on paper, at least).

Like the Footsie lender, Crest Nicholson is also attuned to the health of the UK economy and saw sales dented by Brexit-related uncertainty over the past year, particularly so with its higher-priced properties. All things considered though, the outlook for the business is much stronger thanks to the size of the country’s homes shortage and the time it will take for this to be resolved.

This point has been underlined by more reassuring trading updates of late, including March’s in which Crest Nicholson said forward sales stood at £686m, up around 11%, and that the overall picture remained positive.

In particular, it said: “With employment levels at record highs, a wide range of available mortgages and a structural undersupply of new housing, we are confident in the long-term future of our core housing market.”

Room for upgrades?

As Crest Nicholson commented, the challenges related to customer demand for its more expensive properties look likely to continue a while longer as the political and economic uncertainty in Britain continues.

I’m confident that the supportive lending conditions for first-time buyers, also helped by the government’s Help To Buy purchase scheme, should allow the business to overcome these problems.

And the steady stream of releases from the country’s other homebuilders, companies which also suffer from the same issues of cost inflation and flatter home price growth in the UK, reinforce my positive take. Taylor Wimpey was the latest to chime in last week with news of strong forward sales and record-breaking sales rates. I’m certain it won’t be the last.

City analysts are yet to be convinced by Crest Nicholson’s prediction that revenues and volumes in 2019 will register at similar levels to those of last year. But I’m confident the company’s prediction will appear more and more legitimate as the months roll by and will prompt current earnings forecasts to be upgraded. So I’m expecting more share price gains in the not-too-distant future.

The post Another FTSE 250 dividend hero with bigger yields than Lloyds appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Royston Wild owns shares of Taylor Wimpey. The Motley Fool UK has recommended Lloyds Banking Group. 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.

There are also a number of housebuilders in the mid-cap FTSE 250 index. One of these — Crest Nicholson (LSE: CRST) — released its annual results this morning. Its share price and P/E are even more depressed than Taylor Wimpey’s. Could it be another bargain builder to snap up today?

What’s not to like?

The table below summarises some key value indicators for the four stocks, based on their 2018 financial results (actual or forecast).

As you can see, they’re trading on very low P/Es, with supersize dividend yields. Furthermore, a recent trading update from Taylor Wimpey, and today’s results from Crest Nicholson, paint a reasonably sunny picture. Both companies enjoyed a profitable 2018 and finished the year with net cash on their balance sheets. They also said they’ve strong order books.

Both referred to a few clouds in the sky — notably Brexit uncertainty and customer caution in London and the South East. But overall, the impression given was one of maintaining vigilance in the near term and optimism about the longer term. So why are their P/Es so low and dividend yields so high?

Brexit uncertainty

From our parochial UK perspective, “Brexit uncertainty” seems to be the default explanation for all sorts of things, including a housing market that’s creaking in places. However, when we look as far afield as Canada, the US and Australia, housing markets are similarly teetering or falling. Here are a few recent headlines:

• “NYC’s Housing-Market Weakness Spreads From Manhattan To The Outer Boroughs” (19 January)
• “Canada’s Housing Markets End 2018 With A Thud” (15 January)
• “As Investors Flee Australia’s Housing Bust, Sales of New Houses Plunge to Record Low” (21 January)

Furthermore, the US (like the UK) has a good number of listed housebuilders. You’ll find their share prices have performed in much the same way as their UK counterparts. They’re all down from their highs of last year — e.g. PulteGroup (-22%), D. R. Horton (-30%) and Lennar (-38%) — and on very cheap P/Es. Brexit uncertainty? Really?

Blip or bust?

I believe there’s a common issue hitting many housing markets around the world right now. The post-financial-crisis economic crack-cocaine of low interest rates and massive quantitative easing (QE) pumped up asset prices, including property, to unsustainable levels.

Time has now been called on QE and interest rates are starting to rise. The risk is that house prices are heading for a crash. In a crash, builders’ earnings (and their share prices) typically collapse, dividends are suspended, and there’s nothing to do but batten down the hatches and wait for a recovery.

Are the likes of Persimmon, Barratt, Taylor Wimpey and Crest Nicholson merely suffering a Brexit blip, or are we seeing the beginnings of the bust that always follows a housing boom? Personally, I view the risk of the latter as sufficiently serious to avoid these stocks at this stage.

The post Is the Taylor Wimpey share price primed to rocket? appeared first on The Twelfth Magpie.

More reading

• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?
• This 7.7% yielding dividend stock trades at a 13-year low – time to consider buying?
• £10,000 in these 3 FTSE 250 stocks could generate £982 of passive income over the next 12 months!
• How much would you need in a Stocks and Shares ISA to earn £33,814 a year in dividend income?

G A Chester 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.

Long and short of it

The table below shows forecast price-to-earnings (P/E) ratios and dividend yields for the three companies. It also shows what mainstream City brokers are recommending to their clients (source: WebFG), as well as a summary of current short positions in the stocks — that’s to say, bets on their share prices falling — held by sophisticated hedge funds (source: UKShortTracker).

As you can see, P/Es are super-low across the board and dividend yields are huge. No City brokers are negative on the stocks — indeed, a good number are positive — but there are hedge funds holding significant short positions. In my experience, it pays to be extra cautious when assessing stocks with high levels of short interest.

Kier’s hardiness questionable

Kier is currently the most heavily shorted stock on the London market. I agree with my colleague Roland Head that its net debt is too high for a low-margin business. Furthermore, since the collapse of sector peer Carillion, awarders of contracts are paying closer attention to the financial strength of bidders. Kier’s current level of debt could be a hindrance to winning new contracts, in my opinion.

Debt isn’t the only reason for the large short position here. Kier sports a number of other possible ‘red flags’ that Carillion had displayed, including reverse factoring, joint venture usage, and myriad annual exceptional items. Add these accounting complexities to the high debt and this is a stock I’m happy to avoid.

Crest of wave passed

Crest Nicholson issued a profit warning last month, saying the market for new homes in London, and at higher price points in the south of England, had been tougher than anticipated. I’ve been banging on for a year about how low P/Es and high yields, combined with high margins and high price-to-tangible book values (P/TBVs), are top-of-the-cycle features of the boom-and-bust house-building industry.

I’m interested in house-building stocks when the P/TBV is at, or below, one. Crest Nicholson is getting there, but isn’t quite there yet, with its P/TBV having fallen to 1.1. As such, it’s a stock I’m still avoiding, but one I’m keeping a close eye on. I view a reduction in short positions since the profit warning and a recent big share purchase by the executive chairman as further signs we’re getting near-value territory.

Browned off

N Brown is transitioning to an online-only business but growth is being handicapped by falling offline sales, and the tough retail environment. Aside from seeing only the very strongest businesses in the retail sector as worthy of investment consideration, Brown’s reliance on revenue from charging customers high interest on paying by instalments, further weakens it as an investment candidate, in my eyes. Another negative is a recent profit-denting draft ruling in a VAT dispute the company is involved in with HMRC. This is a stock I’d avoid even if there were no short positions in it.

The post These 3 FTSE 250 stocks have slumped over 20%. Is it time to buy? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

G A Chester 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.

However, there are certain situations where super-high yields are sustainable.

My first company, home and motor insurer Direct Line Insurance Group (LSE: DLG), is a stock I recently bought for my own portfolio. Analysts expect a total payout of 27.7p per share this year, including a special dividend. This gives the stock a forecast yield of 8.7%.

This high yield is just one of the reasons why I recently added Direct Line to my portfolio.

Why I’m a buyer

Direct Line’s share price has fallen by about 15% so far this year. Most other insurance stocks have also fallen as investors have fretted about risks such as rising interest rates, tough competition and increasing claims.

Despite these pressures, profit forecasts for this well-known firm have remained relatively stable. The latest consensus earnings forecasts for 2018 are only 3% lower than they were one year ago.

Mixed news

In a trading statement today, the firm said that gross written premiums — the amount charged for new policies — fell by 5.8% to £854.5m during Q3. However, the number of in-force policies only fell by 3.8% to 15,183. This implies that the average premium per policy fell during the period.

This decline was largely as expected, and chief executive Paul Geddes confirmed that he still expects the business to meet its 2018 targets.

I’m comfortable with this situation and plan to continue holding. With a history of high returns and good cash generation, I rate these shares as a buy.

Is this 9.2% yield for real?

When I last wrote about housebuilder Crest Nicholson Holdings (LSE: CRST) in July, I was wary about investing in a company that was reporting falling profit margins after a long boom.

Has Crest’s recent year-end trading update changed my view? Perhaps. The news still wasn’t very good, as the group’s focus on London and the South East has left it exposed to slowing sales in this region. Sales volumes and profit margins are now both expected to be below previous guidance.

One to avoid?

In this context, the stock’s 2018 forecast dividend yield of 9.2% might seem risky. But the company is shifting its strategy to protect shareholder returns.

Bulk sales of housing to rental landlords will be accelerated, while building rates will be slowed to better match demand. In the meantime, the firm plans to shift production towards cheaper houses and find other ways to cut costs.

Together, Crest’s management expects these changes to enable this year’s 33p dividend to be repeated in 2019.

Analysts’ forecasts suggest that this payout should be covered about 1.8 times by earnings in both 2018 and 2019. If the firm’s strategic shift delivers stable profits, then this 9% yield could be sustainable.

Crest Nicholson stock isn’t without risk, but I think the shares are probably fairly priced at this level. I’d continue holding, for now.

The post 8.7% yielder Direct Line Insurance Group is down nearly 15%, should I buy more? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Roland Head owns shares of Direct Line Insurance. 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.

Of course, there are other shares that offer even higher dividend yields than the FTSE 100, or even National Grid. Reporting on Wednesday, was one such stock which could be worth a closer look for income investors.

Uncertain outlook

The company in question is residential developer Crest Nicholson (LSE: CRST). It reported a relatively disappointing pre-close trading update which showed operating conditions have been tough. It’s not seen the usual pickup in demand for new homes in London, or at higher price points in the South of England in September or October. As such, it now expects pre-tax profit will be in the range of £170m to £190m for the year to the end of October.

The company intends to focus on shareholder returns by prioritising cashflow and dividends, while also maximising the value in its land and development portfolio. With a dividend yield of 8.9% from a shareholder payout that’s covered twice by profit, the company’s income prospects continue to be relatively strong.

Clearly, Crest Nicholson could experience further challenges in the short run. It seems as though consumers are delaying purchases due to fears surrounding Brexit and the wider UK economy. Given the company’s price-to-earnings (P/E) ratio of around 6, though, it could offer a wide margin of safety at the present time.

Defensive appeal

Uncertainty is also present in the wider stock market. The IMF’s recent reduction in global growth forecasts has prompted investors to re-evaluate their views on the outlook for share prices. Recent stock price falls could continue in the near term, with a decline in the FTSE 100 below 7,000 points being unsurprising. That’s especially the case since further tariffs could be ahead, should the US and China fail to reach an amicable agreement on future trade.

Given the uncertainty facing world stock markets, National Grid could become an increasingly popular stock. Its track record suggests that it may be unable to deliver high earnings growth, but could be a resilient and robust stock over the medium term. Investors may flock to less risky assets, of which the electricity and natural gas delivery company could be a prime target.

As mentioned, National Grid has a near-6% dividend yield at the moment. Dividend growth of just under 3% per annum is expected over the next two years. As such, it could prove to be a sound income investment, as well as a strong performer should the FTSE 100 experience continued volatility.

The post Forget a cash ISA! National Grid is a FTSE 100 dividend stock that could grow your savings much faster appeared first on The Twelfth Magpie.

More reading

• Down 15%! Is National Grid’s share price really a bargain right now?
• 3 British dividend stocks to consider for passive income this summer
• How much could a £25,362 Stocks and Shares ISA be worth in 10 years?
• 2 juicy income shares with big exposure to AI
• Are National Grid shares entering a new valuation era in the FTSE 100?

Peter Stephens owns shares of Crest Nicholson and National Grid. 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.

However, these corking construction stocks are not confined to the FTSE 100. One such share that I’m tipping for big things outside the country’s premier share index is Crest Nicholson (LSE: CRST).

The FTSE 250 homebuilder isn’t exactly the flavour of the month right now, however. Its share price has declined 31% since the start of the year, worsened by a pretty uninspiring trading update released in May. Back then, Crest Nicholson said that “generally flat pricing against a backdrop of continuing build cost inflation at 3%-4%” would cause operating margins to fall at the lower end of its 18%-20% guidance for the six months to April.

Yields above 9%

I believe that the weakness of recent months represents a prime buying opportunity, and particularly when you consider Crest Nicholson’s ultra-low valuations. Right now it carries a forward P/E ratio of 5.8 times, well inside the watermark of 15 times and below which indicates very good value for money.

The combination of rising costs and dragging house prices is expected to cause earnings to fall 2% in the year to October 2018. However, with favourable lending conditions and government purchase incentive schemes expected to remain in place, and initiatives to tackle the country’s housing shortage still not forthcoming, the long-term profits outlook for Crest Nicholson and its peers remains supportive.

Indeed, the business announced in its most recent statement in mid-June that forward sales for the full fiscal year (including year-to-date completions at mid-June 2018) were up 12% year-on-year. It’s no surprise therefore that the City is expecting an 8% earnings bounce-back in fiscal 2019.

What’s more, the prospect of the business churning out really bulky dividends through to the close of next year at least adds another reason to sit up and take notice. A 33.1p per share payout is forecast for this year, up from 33p last year and yielding 8.8%. With the company predicted to return to earnings growth from next year, the predicted dividend marches to 35.3p, taking the yield to 9.4%.

Firing on all cylinders

It might yield less but, going back to the FTSE 100, I believe BAE Systems (LSE: BA) is worth a close look today.

It changes hands on a forward P/E ratio of 15 times, bang on that accepted value watermark. This is much too cheap in my opinion given its position as an essential supplier to the US and UK militaries, and the rate at which the West is likely to continue weaponising on command from President Donald Trump.

This position of strength was underlined in chief executive Charles Woodburn’s AGM statement in May in which he said that “we have a large order backlog and strong franchises with good prospects to further these positions in the coming months.” This feeds through to City predictions that BAE Systems will recover from a 1% earnings fall in 2018 with a 9% rise next year.

What with the likelihood that dividends should continue to grow, I think BAE Systems is a great pick today. In the near term payouts of 22.5p and 23.3p are projected for 2018 and 2019 respectively, figures that yield 3.4% and 3.6%.

The post This FTSE 100 dividend hero and FTSE 250 9%+ yielder are trading far too cheaply appeared first on The Twelfth Magpie.

More reading

• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• 1 FTSE stock tipped to handily outdo Rolls-Royce shares by 2027
• Forget SpaceX, here are 3 UK tech stocks to consider buying without the high price tag
• Should investors consider buying BAE Systems shares now they’re back below £20?
• BAE shares are falling: opportunity or warning?

Royston Wild 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.

Accidental profits

Legal services firm NAHL Group (LSE: NAH) operates in the personal injury market, generating leads for solicitors who handle claims. It also works with critical injury cases and has an unrelated service providing conveyancing leads.

The business has two parts — marketing and legal services. The structure of the legal operations has changed in recent years due to regulatory changes. This highlights a major risk with this type of company — it’s vulnerable to political and regulatory interference.

However, my impression is that NAHL is quite a well-run firm. Despite dealing with a changing regulatory environment it’s been consistently profitable and cash generative in recent years, operating with very little debt.

On track to deliver an 8% yield

In a trading statement today, the firm said that trading during the first half of the year had been in line with expectations. According to chief executive Russell Atkinson, “earnings are in line with our plans”.

Based on the group’s revised dividend policy of paying out half the group’s earnings each year, analysts expect a full-year dividend of 9.5p per share, giving the stock a forecast yield of 8%. Trading on a forecast P/E of 6.2, the shares seem cheap.

Overall, my view is that the stock’s valuation reflects the risks facing investors in this business. If NAHL continues to perform well, then I think the shares could be a good income buy at this level.

A potential bargain?

With a market cap of under £60m, NAHL might be too small for some investors. One larger company offering a super-sized dividend yield is housebuilder Crest Nicholson Holdings (LSE: CRST).

Crest’s forecast dividend yield of 8.5% is one of the highest in the FTSE 250. But the firm’s shares have fallen by 28% so far this year, as investors have taken fright at the firm’s falling profit margins.

Expensive houses are harder to sell

The Surrey-based firm’s main focus is on London and the south of England. Prices are flat in these markets, according to management, but the cost of building houses is still rising. As a result, Crest’s operating profit margin fell from 19.1% to 17.2% during the first half of this year, compared to the same period last year.

It’s worth noting that some company insiders have seen the stock’s decline as a buying opportunity. And to be fair, the company still appears to be in good financial health.

Earnings are expected to be broadly flat this year, at about 65p per share. The company has indicated plans to pay a dividend of about 33p for the full year. These figures put the stock on a forecast P/E of 6, with a prospective yield of 8.5%.

Despite this tempting price tag, I’m uncomfortable investing in a firm with falling margins after such a long housing boom. I believe there are better opportunities elsewhere in the property sector.

The post Dividend stocks: Two 8% yielders I’m considering right now appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

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.

Take Crest Nicholson Holdings (LSE: CRST), for example. The FTSE 250 business saw its share price swell more than 20% last year as predictions that the housing market would collapse in the wake of the EU referendum fell flat.

However, signs that the slowdown in the property market is worsening have seen Crest Nicholson erasing all of the gains it had made since the beginning of 2017. And a poorly-received trading update last week caused investors to flee en masse, causing its market value to fall by double-digit percentages on the day.

There is no doubt that the earnings outlook has become a lot less assured for the housing specialists of late. Still,  I believe that share price weakness over at the likes of Crest Nicholson represents a brilliant buying opportunity as the long-term profits picture remains largely robust.

It’s not all bad

In its latest trading release it said that thanks to a combination of flat homes prices and building cost inflation running at 3% to 4%, margins for the full year would clock in at around 18%. This is at the lower end of its target ranging between 18% and 20%.

Crest Nicholson also advised that “sales at higher price points have proved to be more difficult to achieve,” caused by “the greater interdependency of higher-value sales with transactions in the second-hand market where activity has been more subdued and property chains have been taking longer to complete.”

It was obvious that the impact of economic and political uncertainty on the property market would cause earnings at the likes of Crest Nicholson to take a whack as buyer demand moderates. However, first-time buyer appetite is still strong enough to keep profits at Britain’s builders afloat, and this is likely to remain the case on the back of supportive mortgage rates and the government’s Help To Buy scheme.

Crest Nicholson underlined this theme last week when it advised that forward sales for 2018 (including year-to-date completions) were up 11% from the corresponding period last year, reinforcing its prediction of a 15% year-on-year revenues improvement.

Simply put, Britain’s shortage of housing stock continues to drive demand for newly-erected properties. And with population growth likely to keep outstripping build rates due to ongoing government inaction, I am backing Crest Nicholson to still deliver solid shareholder rewards over a longer time horizon.

Look at those yields!

My optimism is backed up by City analysts who expect it to rebound from an anticipated 2% earnings fall in the fiscal period to October 2018 with a 12% jump next year. Margins may be under pressure at the moment, but in the long term these will recover once buyer appetite eventually improves.

And these estimates lead to predictions of further meaty increases in the annual dividend.  Crest Nicholson — which has raised payouts fivefold during the past five years — is expected to increase last year’s reward of 33p per share to 33.3p in the current period and again to 37.3p in fiscal 2019.

These figures yield 7.5% and 8.4% respectively. When you combine this with the company’s ultra-low valuation, its forward P/E ratio standing at 6.8 times right now, I reckon the builder is a very attractive income share to buy today.

The post Why this battered 8% yielder could still make you a fortune appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Royston Wild 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.

Management now expect the group’s operating margin for the full year to be “around 18%”. That’s below last year’s margin of 20% and is at the bottom end of the group’s target range of 18%-20%.

What’s gone wrong?

Housing completions rose by 17.6% to 1,251 units during the six months to 30 April, while average open market selling prices rose by 5% to £439,000. These figures seem positive, but they hide two problems.

The first is that it’s taking longer to sell more expensive houses, due to “a slow second-hand market” in the south of England. The group’s sales rate excluding private rental sector (PRS) projects fell from 0.77 sales per outlet per week last year to just 0.72 during the six months to 30 April.

The second problem is that the £439,000 average selling price excludes homes built for private rental sector (PRS) projects. PRS housing forms a growing part of the group’s business, but the pricing of these cheaper properties is failing to keep up with rising costs.

We can see this from the information the group provides about its order book. Total forward sales rose to 2,079 units with a value of £441.7m during the first half. This works out at an average selling price including PRS of £212,500.

That’s only 1% more than the average of £210,400 reported at this point last year. But Crest says that the cost of building houses is expected to rise by 3%-4% this year. So it’s easy to see how rising costs could be cutting into the group’s profit margins.

Is the 8% yield safe?

After today’s fall, the stock trades on a 2018 forecast P/E of 6.1 with a prospective yield of about 8%. I don’t think the dividend will be cut this year, but if current trends continue, next year’s payout could come under pressure.

In my view, now probably isn’t the right time to buy these shares. After such a long housing boom, I think it’s important to focus on companies whose profitability is improving. I’d avoid weaker players with falling margins.

My top housing pick

The only housebuilding stock I own at the moment is FTSE 250 firm Redrow (LSE: RDW). During the first half of this year, the Flintshire-based firm said operating profit rose by 22% to £175m. Redrow’s operating profit margin rose to 19.7%, compared to 19.5% last year.

The profitability of these two groups is similar, but they appear to be moving in opposite directions. In situations like this, I believe the trend is your friend. I don’t think it’s the right time to be making contrarian bets on housebuilders, as the whole market remains quite highly priced in my view.

Still a buy for me

Redrow trades on a 2018 forecast P/E of 8 with a forward yield of 3.7%. This payout is more modest than some others but it should be covered 3.4 times by earnings this year, compared to 2 times cover for the Crest Nicholson dividend.

While housing market conditions remain stable, I continue to rate Redrow as a buy.

The post One FTSE 250 dividend stock I’d buy ahead of this 7% yielder appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Roland Head owns shares of Redrow. The Motley Fool UK has recommended Redrow. 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.

Reporting on Thursday was a FTSE 250 dividend growth stock which seems to offer a strong income future. However, it may not be the most appealing dividend play in the mid-cap index at the present time.

Solid performance

Releasing a first quarter trading update on Thursday was aqueous polymer specialist Synthomer (LSE: SYNT). Trading during the period has been relatively consistent, with its Europe and North America segment delivering higher volumes than in the comparative period. This was largely due to the positive impact of the Speciality Additives and Pischelsdorf SBR latex acquisitions.

Similarly, the company’s performance in Asia and the Rest of World segment was in line with expectations. Nitrile latex volumes were marginally higher than in the weaker comparative period when customer spending was hurt by a volatile raw material environment. This has helped the business to remain on track to meet its guidance for the full year.

With Synthomer forecast to deliver earnings growth of 5% in the current year and a further 10% next year, it seems to be performing well. This should enable it to raise dividends per share by around 7% per annum during the next two years, which puts it on a forward dividend yield of 2.8%. Since dividends are covered 2.5 times by profit, they could rise rapidly over the medium term and improve the company’s income outlook.

Low valuation

While Synthomer appears to offer an upbeat dividend future, fellow FTSE 250-listed company Crest Nicholson (LSE: CRST) could offer an even more compelling income investment outlook. The housebuilder has a dividend yield of over 7% at the present time, with further dividend growth forecast over the next two years.

The company is expected to report a rise in earnings of 6% this year, followed by additional growth of 12% in the 2019 financial year. These figures should enable dividend growth of over 10% per annum during the same time period, which could lead to a dividend yield of over 8% next year.

Clearly, the housebuilding sector faces an uncertain future and Crest Nicholson’s share price could prove to be highly volatile. However, with the company’s dividend being covered twice by profit and it trading on a price-to-earnings (P/E) ratio of around 8, it seems to offer a wide margin of safety.

Therefore, for long-term income investors who are comfortable with the potential for above-average volatility in the short term, it could prove to be a sound risk/reward opportunity at the present time. Its low valuation plus high dividend growth prospects could mean it is able to justify a higher share price in future years.

The post This FTSE 250 dividend growth stock isn’t the first share I’d buy despite today’s positive news appeared first on The Twelfth Magpie.

More reading

• £5,000 invested in this red-hot UK growth stock 3 months ago is now worth…

Peter Stephens owns shares of Crest Nicholson. 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.