Berkeley Stock Gains Investor Interest with 6.7% Yield, Shareholder Focus

In a brief trading statement, which will do little to move the dial, Berkeley (LON:BKGH) reaffirmed its previous guidance and reiterated its commitment to the new “Berkeley 2035” growth strategy, as highlighted at the interim results in December.

The strategy has a number of strands, with the headlines being projected growth in the Return on Capital Employed, further investment in the group’s recently launched “Build to Rent” platform and an ongoing focus on shareholder returns. It comes against a backdrop of extremely guarded consumer confidence, with the possibility of higher and longer interest rates keeping some potential new buyers on the sidelines. The group also pointed once more to the overhang of additional building regulations as part of the new industry regulator’s formation.

More promisingly, Berkeley noted that enquiries and sales rates were currently ahead of the previous year, and maintained its profit guidance of £525 million for the current year as well as £450 million for the next. This would match the group’s previously stated objective of £1.5 billion over this three-year period, with its focus on the more upmarket end of the housing spectrum proving to be something of a shield against what has been a difficult few years for housebuilders.

Net cash of £474 million in October is estimated to fall to £300 million by the end of April, due to shareholder return and land creditor payments. Even so, the general combination of share buybacks and dividend growth is on track, with the current yield of 6.7%, including specials, being a particular attraction of the stock.

The issues have been partially offset, however, by the advantages which the group obtains from focusing mainly on London and the South East. Higher house prices follow on from a systemic undersupply of homes, employment levels remain strong, and the recent round of wage rises (while inflationary) has helped mitigate some of the problems. The group also welcomed the current government’s more positive ambitions on planning permission and housing delivery.

However, until such time as consumer confidence returns and the revitalised planning system is able to bed in, the sector as a whole is likely to remain under some pressure.

Indeed, Berkeley’s share price has fallen by 26% over the last year, as compared to a gain of 10% for the wider FTSE100, with a drop of 28% over the last six months largely contributing to the net decline. Well-regarded though the company may be, the market consensus of the shares as a hold implies that investors are not yet quite convinced that the new strategy and the existing sector obstacles are at the required inflection point.

Markets Struggle as Economic Data Fails to Lift Sentiment

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Meanwhile, some promising economic data cut little ice with investors. The Producer Price Index was flat for February against expectations of an increase and followed a softer-than-anticipated Consumer Price Index number earlier in the week, signalling no immediate pressure on inflation. At the same time, jobless claims were lower, suggesting that the labour market remains steady for the time being.

Enter the President. The latest tirade threatened 200% tariffs on alcoholic products from the EU, while confirming that the planned broader set of tariffs due to take place on 2 April would be going ahead. The constant barrage of measures over recent weeks, which are likely to hamper the economy, have already disrupted markets, with the benchmark S&P500 now joining the Nasdaq in correction territory.

The uncertainty has left the main indices reeling, with losses of 4% for the Dow Jones, 6.1% for the S&P500 and 10.4% for the Nasdaq in the year to date. Smaller caps have also given up the ghost of the initial election optimism, with the Russell 2000 index down by 19% since its recent high and therefore perilously near bear market territory.

The premier index limped ahead at the open, with a marginal preference for growth stocks coming at the expense of some more defensive names. The market has been insulated so far from some of the global trauma and, despite the relative strength of sterling which would normally work against its constituents, the perceived defensive nature of the index leaves it ahead by 4.5% in the year to date.

Meanwhile, proof, if it were needed, that the UK economy remains in need of a kickstart came with the release of the latest GDP numbers. A decline of 0.1% in January came against an expectation of growth, although over the last three months the economy has been able to eke out a small gain, albeit marginal.

Of course, this reading has been overtaken by events since January, with little of late to dissuade the bears that brighter times are ahead. The FTSE 250, which is something of a barometer for the domestic economy, has fallen by 4.5% this year and in the absence of more monetary stimulus from the Bank of England, the pressure will likely remain.

Written By: Richard J. Hunter