A near-9% yielder that you may regret not buying

Bovis Homes

Another day, yet another ringing endorsement concerning the health of the UK housing market. This time Bovis Homes Group (LSE: BVS) took the opportunity to highlight the resilience of the segment, the country’s housebuilders continuing to shrug off the impact of toughening economic conditions.

In its end-of-year trading update the Longfield-based business advised: “The Group had a very disciplined year end and delivered against all of its financial and operational targets for 2017.”

Bovis hasn’t had the best of it in recent times of course, the company being forced to implement the humiliating steps of curtailing production rates in 2017 amid complaints over the quality of its properties earlier in the year. Consequently completions dropped 8% year-on-year to 3,645 homes.

But the FTSE 250 business made the best out of a bad situation, and it has lauded 2017 as providing a “step change” in the quality of its homes. With Bovis also moving away from its lower-margin sites and expanding its housing ranges the future certainly looks bright.

Consequently, the business expects things to improve significantly from the current fiscal period, advising: “The industry fundamentals remain strong with customer demand for new homes supported by attractive mortgage finance and government initiatives, in particular Help to Buy.

Our forward order position is strong, and with robust industry fundamentals, we expect the group to deliver a significant improvement in profitability in 2018,” it added.

Cash king

Bovis’s solid update comes as little surprise to me. Indeed, I have long sung the builder’s praises as a great pick for those seeking resplendent dividend growth in particular. And today’s release has reinforced my optimistic take, the construction colossus seeking to hike the ordinary dividend by 20% in 2018, and to fork out a first special payout too.

The City is touting a 47.1p per share ordinary dividend for 2017. But for 2018 the total payment is expected to sprint to 99.1p per share, meaning the business sports a mega yield of 8.6%.

A better-than-expected cash position at the close of the year certainly lends extra legitimacy to these heady forecasts, Bovis declaring today net cash of around £145m as of December 31. And looking further down the line, the firm commented that balance sheet restructuring remains on track to deliver at least an additional £180m cash flow boost by the end of 2018.

A cheap growth and income star

As a result of cutting build rates, earnings are expected to have tipped 19% lower last year. But having grasped the nettle to improve product quality, Bovis, supported by a combination of a chronic homes shortage and stable new homes demand in the UK, is expected to bounce back from this year. A 26% bottom-line improvement is currently being forecast by the number crunchers for 2018.

And this forecast leaves the business dealing on a low forward P/E ratio of 12.5 times. This reflects a disproportionately pessimistic view of Bovis’s earnings outlook, in my opinion, and I therefore reckon the business is a genuinely brilliant bargain buy at current prices.

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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.

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