Founded in 1946 by the family Bell, Bellway is a British property developer active in the construction and marketing of housing. All of its turnover is generated in the United Kingdom.
With a market capitalisation of £3.6bn (around CHF4.6bn), Bellway is the UK's fourth largest property developer. Its competitors include Persimmon, Berkeley, Taylor Wimpey, Barratt Development and Bovis Homes.
Bellway is a strong company with £701t of equity. From 2011 to 2017, turnover increased from £886m to £2558m (+£1891t). At the same time, net profit increased much more than proportionally going from 50 to 454 million GBP (+808%).
Despite the 2008 real estate and financial crisis, the stock has gained around 10,00% since 1994, all with a volatility half that of its benchmark index, the FTSE 250 (beta of 0.48).
The net profit margin (NPM) stood at 17.7% in 2017, a very high value for the real estate sector. The return on equity (ROE) is not far behind, with a value of 20.7%.
The dividend has increased from £0.13 in 2011 to £1.22 in 2017, an increase of £838%! And the most incredible thing is that the payout ratio has remained extremely stable and conservative during this period (currently: 33%). In other words, the explosion of the dividend has been parallel to that of earnings per share and is not simply due to an inflation of the distribution ratio.
At the current price of £28.38, the dividend yield of £4.7% is very attractive. As a reminder, British dividends also have the advantage of not being subject to withholding tax.
With a P/E of 7.3, the stock is very cheap., which is mainly explained by the uncertainty surrounding the conditions of Brexit (which will be effective on March 29, 2019) and which weighs on all British real estate stocks. Investors fear a more or less significant slowdown in the real estate market in Great Britain depending on the conditions of exit from the European Union (soft Brexit or hard Brexit).
The stock has lost around 20% since the start of the year and is even trading 25% below its all-time high. I believe that the consequences of Brexit are already more than integrated into the price and that the current valuation represents an interesting opportunity for a long-term investment.
Berkeley is also a good alternative to Bellway. However, I would advise against Taylor Wimpey, Barratt Development and Bovis Homes.
Persimmon is a special case: the company is healthy but I am wary of the dividend yield which is far too attractive (9.8%!) which in my opinion serves as a lure to attract imprudent investors. Indeed, this dividend could be quickly cut at the first difficulties, given the payout ratio which is far too high of 92%. Shocking!
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Thanks dividinde for this analysis.
It is indeed an interesting company. In the same style I had recently looked at Berkeley which you also mentioned.
Bellway definitely has some nice qualities that remind me of a franchise:
– high margins
– very low overheads
– insignificant debt
– very low capital expenditure
Moreover, the stock is currently trading at a very affordable price, at least relative to earnings and sales, and even relative to tangible assets. EBITDA stands at 16,27% of enterprise value, which confirms that Bellway is currently an opportunity.
On the other hand, the valuation is clearly less interesting compared to the FCF. Moreover, if the payout ratio is very prudent compared to profits, it is clearly more problematic compared to the FCF since the entirety of the latter is used to pay dividends.
Another problem to note is the current ratio which is 3.7. We could say that it is cool to have a lot of liquidity, but at this level it is a waste. On the contrary, if we look at the quick ratio, it is only 0.16. This means that current assets are essentially immobilized in the form of stocks (current assets = 3099 million GBP / Inventory = 2968 million GBP).
Regarding profitability, it is indeed very good, with the 20.7% ROE that you mention, but also with an impressive ROA of more than 14%. To be weighted nevertheless by a profitability in cash flow of assets (CFROA) of only 4.86% (which confirms our disappointing figures already noted above compared to the FCF).
So, in conclusion, a solid, cheap stock, but with a bit too much tied up inventory and some FCF issues. Nothing too serious, however, especially since this company has the characteristics of a franchise.
Excess liquidity (respectively fixed inventory) does not bother me more than that, I prefer a company that is too cautious than a hothead. On the other hand, what you say about free cash flow bothers me more, even if the reasonable valuation at least partly compensates for this defect.
Do you also share my opinion on Persimmon?
Clear! With more than 9% of yield there is no need to push the analysis too far... we already know that it stinks.
The current and average payout ratio, compared to profits and compared to FCF, is out of bounds => risk of stagnation or reduction of the dividend.
Overall a bit more expensive than Bellway. However, better than the latter from a FCF perspective.
Regular increase also in the number of shares in circulation => dilution of shareholders' assets.