Shares in housebuilder Berkeley Group Holdings (LSE: BKG) rose by 25% in May:
These latest gains mean that Berkeley shares have risen by almost 300% over the last five years, taking them to an all-time high of more than 3,000p. There was no mistaking the big catalyst for the share price in May, as the firms move upwards started on the day after the general election.
The governments Help To Buy policy has helped housebuilder maintain prices and sale volumes. Following the Conservative win, the markets are pricing in more of the same.
So what: Housebuilders were hit very hard by the 2008/9 crash, but have proved to be some of the most profitable recovery plays since then.
One of Berkeleys biggest attractions for investors is its 1.7bn capital return programme. In 2013, the firm committed to pay out 568m to shareholders by September 2015, then 567m in 2018 and 2021. Thats 13 per share by 2021.
The 2015 slice of that payout equates to 434p per share. By the end of March 2015, just 90p of this was outstanding. This will be paid as a further dividend later this year. The firms total payout for 2015 is expected to be 180p, giving a prospective 2015 yield of 5.9%.
Berkeleys commitment to similar payouts by 2018 and 2021 mean that the shares high yield might be maintained for a number of years. This suggests to me that income investors could still profit from Berkeley, despite the firms shares already trading at record highs.
Now what: Berkeley has taken advantage of strong market conditions to maintain a debt-free balance sheet and build up its land bank. The firms latest trading update reported net cash of 400m and said that demand remained good in London and the south of England, where Berkeley operates.
As a result, Berkeley reiterated its earnings guidance for 2016 and its plans to return 433p to shareholders by September 2018 through regular dividend payouts. According to the latest analysts forecasts, this leaves Berkeley shares on a 2016 forecast P/E of 11.8 and with a 2016 prospective yield of 5.5%.
Investors might want to note that while this P/E seems modest, Berkeley shares arent necessarily cheap.
Housebuilders are currently enjoying booming market conditions and very high profit margins, but these could moderate if the cost of land, labour and materials rise due to strong demand. Similarly, a slow-down in house price growth or an increase in interest rates would be likely to eat into profits.
Housebuilders are very cyclical businesses and in my view, a more accurate measure of Berkeleys valuation is its price-to-book ratio. Berkeley shares currently trade at 2.7 times their net asset value. Thats not cheap at all, in my opinion.
As a result, Id only buy Berkeley for income, as I believe the growth outlook is limited from here on. I rate the shares as a hold.
If your portfolio already has its fair share of housebuilders, now could be a good time to diversify. One possible choice is the fast-growing UK firm highlighted in “3 Hidden Factors Behind This Daring E-commerce Play“.
The company concerned has a history of impressive growth and high profit margins.
If you want to take a closer look, then download this FREE, no-obligation report immediately, as it will only be available for a limited time.
To receive your copy today, click here now.
Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.