Why growing housebuilders are preferred to "returners"

For housebuilding investors still jittery about recent political and economic events, Taylor Wimpey may have helped to calm their nerves Tuesday.

Chief executive Pete Redfern described UK housing market fundamentals as still favourable, with no material change in trading since the general election result caused a hung parliament. Even the central London market is seeing improved consumer confidence after a period of uncertainty, he added.

Overall, Redfern said Taylor Wimpey's trading had been "very positive" in the first half, underpinned by low interest rates, the Help to Buy scheme and a competitive mortgage market.

The group reported a bigger-than-expected rise in underlying profits of 25.7% to £335 million. However, this was offset at the bottom line by a previously announced provision of £130 million to help customers who bought leasehold properties with escalating ground rent charges.

The results included a further special dividend of £340 million, equivalent to 10.4p a share, to be paid next summer. Coupled with today's ordinary dividend of 2.3p a share, Taylor Wimpey said it will have met its target of returning £1.3 billion in dividends between 2016 and 2018.

There was also a pledge to make further material capital returns to shareholders in 2019 and beyond. Details of this will be revealed in a strategy update in the first half of next year.

Since commencing the payment of special dividends in 2014, Taylor Wimpey has returned about £900 million to shareholders, including £301 million last month.

Taylor Wimpey reported a strong order book representing 8,741 homes, with a total value of £2.1 billion. These figures were broadly in line with a year earlier.

It completed a total of 6,580 homes, an increase of 9.3%, while the average selling price rose 6.3% to £253,000.

Sentiment in the housebuilding sector was damaged by the Brexit vote, but has more than recovered since then. In fact, 10 of the 12 companies that make up the FTSE All Share's Home Construction sub-sector saw double-digit share price returns in the first half of 2017.

Including Tuesday's 3% improvement to 196p, shares in Taylor Wimpey are now up by around 67% since June 2016. But Liberum analyst Charlie Campbell offered a note of caution, with a hold rating and target price of 181p on the stock.

He said: "We still prefer the growers to the returners. Top picks: Bellway, Galliford Try, Gleeson and Redrow."

Campbell added that the sizeable beat in H1 will not necessarily follow through to the whole year as production will be better spread out than last year.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.