...as today we have had final results from Persimmon (PSN), a fruit and one of the largest UK house builders. As with other house builders these are strong, as one would expect, so I won't dwell on the detail for which I suggest you look into the full announcement at their investor website. On the income front worth noting though that they boosted their planned return of capital under their plan to 110p again this year and they boosted the extent of this further by suggesting a similar level of returns for the next five years too. At this mornings price of around 2050p this would give a decent yield of 5.4%.
While on the earnings front the 173p seemed to well ahead of forecasts and close to the 176p currently forecast for the coming year. So I presume we could see some upgrades to earnings and dividend forecasts on the back of these numbers. However, this may be required to keep the shares going as others in the sector have been weak and this one looks a bit expensive on a PE of 11.6x before any upgrades and they are not far off resistance from their highs last September. Thus I probably wouldn't chase it up here and if you wanted a house builder the higher scoring stocks in the sector on the Compound Income Scores are Bellway (BWY), which is in the Compound Income Scores Portfolio and the lower yielding Inland Homes (INL) if you are not so worried about income.
Meanwhile amongst a flood of other announcements and dividend cuts from BHP Billiton (BLT), Ladbrokes (LAD), and Standard Chartered (STAN) I've seen a 22.6% increase in my dividend from Provident Financial Group (PFG) which was about 2% better than forecast. This non standard lender continues to do well on the back of restructuring their home collected credit business, the acquisition of car loan business Money Barn and growth in their Vanquis bank business which includes a credit card operation too. The shares have however factored much of this growth in as they have doubled in the last two years to their current 3300p or so and now trade on a PE of around 18x with a yield of 4% for the current year on the back of a further 10% growth. Thus they seem fairly fully valued to me although they did trade up to 3600p recently. They are probably a strong hold though for income and growth as they continue to fund their dividend and growth from internally generated capital, including their latest venture into on line loans under the Satsuma brand.
We have unsurprisingly had strong updates from housing and property related stocks recently, with Taylor Wimpey (TW) reporting today being the latest house builder to report strong trading.
Meanwhile we have also seen a trading update from Savills (SVS) the global estate agents, facilities management and property investment manager which has been in the Compound Income Scores portfolio since inception in April last year. In the update they said that the Group experienced a strong finish to the year with the completion of some significant commercial transactions in several of their businesses around the world. In addition they also flagged a stronger than expected year for their investment management operation on the back of some disposals occurring sooner than expected.
As a result they said that they expect underlying results for the year to 31 December 2015 will be ahead of their previous expectations, so this may lead to some upgrades to this years numbers in the short term. However they sounded a note of caution about the current year on the back of heightened uncertainty over global economic prospects and rising interest rates. Consequently they said that they expect a tempering of the strong transaction volumes seen recently in certain markets, but nevertheless they felt that market fundamentals remain sound. Accordingly they retained their original expectations for 2016 suggesting no changes to forecasts for next year despite the strong performance this year.
The shares are up modestly by around 1.5% today at pixel time and by just over 5% from the price last April when they were purchased for the portfolio. They now trade on 14x with a 3% yield for the year just ended which falls to around 13x with a 3.3% yield on the back of forecast dividend growth of 11%. This seems fair enough and they currently score 81 on the Compound Income Scores which therefore leaves them close to the automatic sell zone between 75 and 80, but we'll have to see where they sit when it comes to the next quarterly review due at the end of March. On the chart the shares had come back toward their lows of last Spring recently, while on the upside, moving averages and price peaks between 900p and just shy of 1000p look like they may provide some resistance. So like the update not too much to get excited or worried about either way for now, hold.
...continued strength in the UK housing market as we have had a few announcements today. Two from Inland Homes (INL) and M.J.Gleeson (GLE) relate to development land sales suggesting that there is still good demand for land, especially in the South East. In addition we had strong looking results from Berkeley Group and a further special dividend as expected.
However the experienced Chairman there, Tony Pidgley, was quoted in this article as saying "while the recent general election had brought stability, but warned that upcoming mayoral elections and uncertainty over Britain’s role in the Eurozone could impact business. “Berkeley is a supporter of the UK remaining in Europe as this is the best way for London to remain a world city," said Pidgley. "
Now I guess that makes sense for Berkeley Group given their emphasis on London in particular and I guess the uncertainty or even an unexpected vote to leave could diminish the attractions of the London property market and as has been reported could also cause some large banks like HSBC & JPM may move parts of their operations to Luxembourg as has been rumoured in the event of an out vote.
For the rest of the industry which is probably more nationally based in general this uncertainty should not have too much effect on demand for houses in the short term. However, I guess if there was an out vote and if the government did then eventually get to grips with immigration then that could reduce some of the demand push, but a couple of ifs there so I wouldn't worry about that just yet.
...that Bellway - (BWY) the UK house builder (CI Score 99) announced bumper interim profits today as they had already flagged in a prior trading update that they would see strong trading results which would be weighted towards the first half. So rather than reproduce lots of big % gain numbers like the 56.1% rise in earnings I'll leave you to read the announcement if it is of interest. Of interest to me was the fact that the dividend was also up by 56.3% to 25 pence. They suggested they would continue with "The payment of a progressive dividend, together with the growth in net asset value, is delivering long term, sustainable returns for shareholders."
So given that they already told us that the results were going to be first half weighted what does this leave them to do in the second half? Well last year they made 89.9p of earnings in H2 and they have just reported 103.5p in H1 this year. So looking at forecast of 210.2p for the full year (Source: Stockopedia) this leaves them 106.7p to do in the second half or growth of 18.7% in H2, which doesn't seem too demanding against the growth just reported.
However, I guess we have had some signs of a slow down in the housing market and with the General Election to come this could impact them. But talking of politics each party seems to be trying to out do the other in terms of the number of house they are planning to build - although I'm not quite clear how they are going to do that? Plus the latest scheme from the Chancellor George Osborne to provide help to buy ISA's with tax relief on top might eventually help (house prices) at the margin, but surely increasing supply and bringing prices down would be better for those looking to get on the debt treadmill, but then falling house prices presumably don't help win elections.
Any way I digress, getting back to the point, it seems Mr. Market likes the numbers and has marked the shares higher this morning by around 4% to nearly 2100p. Looking at the chart (see below) they seem to be making a break for new highs, which will be good if it is confirmed. I see also that Panmures and Liberum have price targets of 2126p and 2278p.
However, I note that the shares have gone up faster than some builders scaffolding recently and their vertical ascent has also left them looking overbought in the short term.
So on around 9.5x with a 3.5% yield (3x covered) based on current forecasts for this year, before any changes on the back of today's numbers, they seem fine but I probably wouldn't chase them up here. It will be worth watching to see what happens to the numbers to see if there are any upgrades as this could make them look better value and possibly justify the higher price targets.
So there you go:
No Alarms and No Surprises
Such a pretty house, such a pretty garden
Radiohead - No Surprises - seems like an appropriate song for today so see also the video at the end if music is your thing and even if its not I would urge you to check it out as I think Radiohead are an "interesting" band and this tune is one of their more relaxing, if a bit weird - enjoy.
Company news flow finally seems to be picking up with a couple of names I have covered in the past reporting updates today. The first of these is the house builder Persimmon (PSN) which unsurprisingly, given the strength in the housing market and the resultant price inflation, reported a strong trading update.
The average selling price for the Group in 2014 was c. £190,500, an increase of 5% over 2013 (£180,941). Full year revenues increased 23% over the prior year to £2.6bn (2013: £2.1bn). This revenue figure looks to be about 1.5% ahead of consensus forecasts (Source:Reuters / Stockopedia). They also remain confident of a further improvement in operating margins for the second half of the year which will underpin significant growth in pre-tax profits and excellent cash generation for the year ended 31 December 2014.
This suggests to me that they could slightly exceed current earnings estimates and perhaps report around 120 pence of earnings which together with the forecast dividend of 78.3 pence would leave them on 12.8x and a yield of 5% based on a price of 1537 pence this morning. They also have cash on the balance sheet of £378 million (around 8% of the market cap.) a strong forward order book and they have been able to add to their land bank.
So all in all seems reasonable, but I suspect the housing market may soften a little in the first half of 2015 given the strength last year and perhaps some uncertainty with the election coming up. But with the on going help from the government and the need for more houses to be built they still seem well placed to grow in the medium term with a likely tail wind of further modest house price inflation to help so I'm happy to hold on to this one for now, although I did top slice some Bellway at the end of last year.
Meanwhile today we have had the first of the food retailers, Sainsbury's (SBRY) with an update on their Q3 and Christmas trading. Here as we all know we are seeing the effects of price deflation which is leading to them seeing falling sales with:
So I will be steering clear of this one having sold it last year when Justin King stepped down as i think the price deflation and margin squeeze they are facing continues to be a toxic mix. Added to which they look like they will be cutting their dividend for the next two years which is never good in my book, but more on that another day.
Summary & Conclusion
I titled this piece inflation versus deflation and here you have an example of the effects of these forces on two businesses and this is why I currently favour Persimmon over Sainsbury's plus the opposing trends in their likely dividend payments, although Persimmon's is somewhat complicated by their capital return programme. But it does emphasis the importance of looking at trends in turnover and margins among other things when researching a company as per my check list. Plus see the chart below for what it has meant for the shares.