Member Info for strictlybricks

"As Bdev have a ROCE of 30%, why would they want to do a buyback?"
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schwee,

Bear in mind that Barratt shares are currently selling at below book value...

Okay, only slightly, at a PBV of 0.93.

Imagine an extreme theoretical example, though....

Suppose Barratt shares were selling at only 4p...

Every 4p of spare cash spent buying back its own shares would buy over £4 of book value.....

And my calculation says that Barratt made a return on equity of 18.7% last year.

So that would be 74.8p earnings on £4 of book value.

And if that £4 of book value purchased cost only 4p, that would be a 1,870% return on cash spent...

And counting, of course, as that's only year one...

Of course, the actual situation is not one in extremis like that...

But I'd still rate it as a pretty good use of cash ~ compared to a company like Next, for example, that has bought its own shares back over the years at a seriously high price to book.

Of course, if Barratt continue to buy back their own shares on a price that rises above book value per share, as the price continues upwards I would say that your question would become ever more valid...?

But, at this level, way to go...!

Strictly

Gary/DM,

A thought to conjure with on that is that providing Bellway continue to make around their long term average 16% return on equity for the next three years (though that's obviously nowhere near a given as things are shaping up) and providing they stick with their plan to reduce dividend cover to two and a half times as from 2024 (from always having previously been at three times cover for around forty years…), you'd then be looking at a dividend yield of around 10% on that purchase price.

And this for a company which, unlike Persimmon, isn't sacrificing most of its growth for a big payout.... so, based on Bellway’s long term track record, one might reasonably anticipate the dividend payment growing by a further nearly 10% a year from there…?

How cool is that if it works out that way…?

As I have said before here, Bellway really is the "Ghost Dog" of house builders.

I've just put out a comment elsewhere headed "Are we there yet?" ~ by which I mean the bottom.....

I have no view to express on that but, if we are, I echo Gary's comment for a purchase made at 1,868p... well done...

Alternatively, of course, on Monday, you may well be kicking yourself for not having waited longer…?

But who can odds that...?

Apart from Captain Hindsight ~ and where is he whenever you need him...?

I suggest that everyone keeps their hard hats on in the meantime… :-)

Strictly

Molrey,

When you've spent more than twenty years boiling down this investment malarkey to just four or five companies whose shares you're interested in owning ~ and only then during the periods when they've hit perceived best value within that very small group ~ it's probably inevitable to end up with numerous ways of "slicing the cake to see if you can spot a maggot".

At least, that's been the case for me and this game has certainly brought forth my inner anorak over the years...

And what you've offered there is another way to ponder the questions "Is it best value?" and also (and especially now) "Is it safe?".

So, thanks for that....

And that's another indicator that Bellway has the best balance sheet in the sector... and, on the whole, generally that's always been the case.... but, being Bellway, they seem to largely just slip by unnoticed....

Strictly

Seamus,

If you click on my name here and scroll back through my old stuff going back years now, I've banged on ad nauseam about all this in the past....

We ~ that is, myself and at least some of the SB crew ~ have been in this game more than twenty years now and, so far, it's stood the test of time as I'm very happy with the long term returns....

But, to do this, you will necessarily need to do some detailed number crunching, and then keep updating the number crunching, and also while paying close attention to the value shifts...

But it seems you may just have grasped a core paradigm shift in all this, that I bang on about to my lot but still, after many years, plenty of them still don't truly "get" it.

I mean, letting go of house builder shares as against cash, and fully embracing house builder shares as against other house builder shares...

That’s it…

It sounds so simple, doesn't it..?

But I've witness virtual epiphanies, on occasion, when the penny has finally, & usually suddenly, dropped for someone....

So, IMO, it really is worth the effort to make sure you get there... :-)

Strictly

Gary,

Yes, I am sure you are right that this would push the price up a bit....

But here's the thought to conjure with...

Our (and by "our" I mean the Strictly Bricks crew ~ I've just also appropriated our blog name for my nom-de-plume here, but there's actually rather a lot of us in this investing-only-in-house-builder-shares malarkey) strategy is to remain fully invested, come rain or shine, and to only invest in, and trade between, house builder shares.

Currently, that is between Bellway and Redrow, nothing else comes close right now in our assessment of value (each to his own on that front, though… obviously…).

So, of itself, it doesn't really matter what price I bought Bellway at relative to a takeover price, because that would be all about a relationship between Bellway and cash.

Whereas, what DOES matter, and what I'm entirely interested in, is the relationship between Bellway and Redrow, and their relative perceived value at any time, and the currency we have to evaluate between them is weighted book value.

So, the likelihood of outcome of a bid for Bellway, I would say, would be that all builder shares would go up in price to some degree but that Bellway’s price would rise more ~ and that in turn would likely provide for a round trip gain on buying back Redrow shares from the proceeds of selling Bellway (having previously sold Redrow shares to buy Bellway, and so on…).

In other words, I would anticipate ending up with more Redrow shares than I’d held at the start of that particular “round trip”.

………………………..

But the real b'stard of the piece would be losing Bellway as a player....

That would be a VERY big deal for me and the SB crew...

I can't speak for the others, but I would probably weep for the loss...!

Strictly

Gary,

I have absolutely no view on where prices may go in the short term...?

Or any other term, really….

A couple of things to consider which may help, though....

Unless you think Bellway, etc., are going to suffer some real damage as a company themselves from whatever is currently coming down the pike at us, they are seriously cheap on any historical basis....

Their average PBV tends to be around 1.4 or so (it would no doubt be higher, but they are like Ghost Dog, after all ~ I mean, they slip by without people noticing and that seems to include most investors...)

And their long term average ROE is around 16%, yet they are projected to come in just above that for this year... so why a current PBV of just over half their average ~ a lot of fear built into that, I reckon...?

And the other thing is that my strategy has always been to remain fully invested throughout, despite that I did largely swerve the covid tsunami ~ I see that as a lucky one-off and that my lot in life is that I am unable to divine what may happen and so I necessarily just have to brass it out when it comes to the vicissitudes of the market.

And I no longer add new money to investments (I’m all in anyway), I only pull dividends now, plus any gains from round trip trades, so that makes me pretty financially neutral in terms of needing share prices to be high or to be low....

On behalf of others in my investing circle who are in large part the next generation down from me (or even two generations down) saving for pensions in SIPPs, I'd like to see prices remain stupidly low so they all get more ongoing bang for their buck with reinvested dividends and any new money in...

If they too reach the point when, on retirement, they only need to draw dividends then they too don't have to give a f.ck what the price is doing either...!

My concern, though, remains a fear of these companies being taken over through being too cheap.

Beyond that, I would suggest to you not to commit time & energy trying to predict what the share price will be tomorrow, next week, next month or in two years' time....

Unless, of course, you're lucky enough to be drinking pals with the Captain (Hindsight).

Strictly

You can be ageist... I don't mind... I readily acknowledge that I'm an old git these days... :-)

Deadly,

Yes, I am sure that the Wilson Bowden brand does have value....

But if we're trying to assess relative value then we need to make sure we're comparing apples with apples.

So, taking it that other house builders obviously also have brand value & recognition (for better, or for worse in some cases, perhaps…?), because the brands have grown with the companies themselves rather than having been purchased and so requiring a balancing figure on the balance sheet in the shape of goodwill & intangibles, they don't appear on the balance sheet at all...

So, in order to truly compare like with like, that item has to be taken off Barratt's balance sheet for comparison.

Moving on, as you have different figures for liabilities, I thought I'd better go back and check in case of any senior moments on my part ~ a frequent occurrence at my age ~ and there was one, so mea culpa for that.

Bellway, latest half time whistle, £1,190.8m total liabilities divided by £3,429.8m net tangible equity = 35% not 32%.

Don't know what happened there...?

Barratt, £1,956.3m total liabilities, also as at latest half time whistle, dividend by £4,683.8m net tangible equity (being £5,589.7m less intangibles £905.9m) = 42%.

so, the gap between them on that metric is smaller than I'd suggested ~ my apologies ~ but still no cigar for Barratt..... :-)

And, finally, to put a number on the value gap between the two companies for me, I have a negative book value weighting in for Barratt (against Bellway, ~ all other houses are rated against Bellway being that it is my benchmark share) of 10%.

With this weighting, Barratt's PBV of 1.02 (and I only calculate a BVPS for Barratt every six months, not every month as for Bellway, because it is not currently in the frame for me) increases to a weighted PBV of 1.13 as compared to Bellway's 0.74.

Which makes for a huge perceived value gap of 52% in my world.

So, barring some b'stard taking Bellway & Redrow private, there's quite a relative price movement required for me before Barratt moves up to a monthly BVPS assessment, let alone becomes a consideration for a trade.

But I have owned Barratt shares in the past, and I do anticipate owning them again at some point in the future…

Rust never sleeps, and all that…!

Strictly

Deadly,

Good that you come to your own view on this.... if Bellway and Redrow were taken out of the game by private equity or whatever (a lingering concern of mine!) then it would likely be Crest, Barratt & Taylor Wimps in the frame for me instead.

One thing I omitted from yesterday's missive, which you may or may not regard as being pertinent, is that I look at overall balance sheet liabilities rather than just cash or bank borrowings and, on this basis, Bellway has the stronger balance sheet with just 32% total liabilities against net assets.

Whereas, once you've adjusted Barratt's balance sheet for the £900 million of mythical assets which are the legacy of their purchase of Wilson Bowden ~ Barratt being in denial, if you like, by not just simply writing it off ~ Barratt's equivalent percentage balance sheet liability is 42%

It sounds like you're looking to buy & hold ~ which is obviously a different game to mine...?

I wish you the best in your investment progress though… :-)

Strictly

Deadly,

PART 3

PS. Hope all that's of some use..? :-)

Strictly

Deadly,

PART 2

And, coming more up to date, Barratt's five year average ROE, pre covid, is 19% compared to 23% for Bellway.

So, IMO, pound for pound, a unit of asset in Bellway is most certainly worth more to me than a parallel unit of asset in Barratt.

To me, that's a no-brainer.

The degree of difference... ah, well, that's the hard part...!

Once I have come up with a view on that I apply a book value weighting.

And taking all the above into account, clearly, for me, Barratt would need to be selling at a somewhat lower PBV than Bellway to be worth considering.

However, right now, it’s on a PBV or about 1.0 compared to Bellway on 0.75.

So, for me, there’s no contest ~ but, of course, please DYOR as I’m not doing advice here just giving you an outline of our game, which has worked for me for more than two decades now….

Strictly

Deadly,

PART 1

A few things to think about, perhaps...?

Firstly, though, if you've scrolled back through some of my comments here you'll probably have soon come to the conclusion that I'm pretty anal when it comes to investing in house builders shares ~ in any case, the name surely gives it away..?

My moniker here is actually the name of a private website/blog I share in large part with my circle of family and friends & which underscores a whole investing philosophy ~ practiced by most of us in that circle ~ of seeking best perceived value in house builder shares at any time and being prepared to shift holdings for incremental gains.

So a couple of things to consider here...

Firstly, can you be a.sed to do the legwork, and to keep it current, to reasonably assess best value, and secondly, can you be a.sed, to pay attention sufficiently to be ready to trade on the modest gaps as & when they arise...?

To put some shape on this, I reckon our game has historically added an additional 6% a year on average to the gains made by Bellway, our benchmark share and affectionately known as "Ghost Dog" within our circle (you'd need to have seen the film to know what the bl..dy hell I'm on about there).

6% a year may not sound much, but it would mean doubling every 12 years against buy & hold or, over a more reasonable investing career of 36 years, increasing eightfold over buy & hold.

Winning the lottery in slow motion, if you like...?

But Bellway is our benchmark share for a reason, and this no doubt is what you want to know about.

Bellway has paid a dividend every year for forty years.... without fail… even though they've been through two periods in that time (we're currently in the second of those) in which they've had to scale back the payment to then recover later.

They've never engaged in any "shareholder capital return plans", unlike others, and which IMO are just bo..ocks to snare investors who love the big payouts but at the price of not focusing on the damage to growth & long term shareholder value (this is clearly a rather controversial viewpoint on PSN chat here, but there you go).

Bellway have made a long term average return on equity of around 16%.

By sharp contrast, Barratt have got things badly wrong twice over that time, and potentially existentially so leading up to the credit crunch with a new, relatively inexperienced MD at helm who largely destroyed Barratt's balance sheet through buying Wilson Bowden utilising huge borrowings in about 2006 and they still haven't properly recovered from the eye-watering rights issue required to save the company from going belly up.

Strictly

“A big difference between the current global inflation and previous local inflation to certain countries is the cause.”

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Trump, thanks for this post, a very worthwhile observation to make in my view...

Because I reckon you have nailed it correctly.... at least, insofar as things stand at this stage of the game.

However, a further concern surely has to be that we don't know how temporary, or how long lasting, this may be for, and also we haven't yet seen the extent to which it is dealt with by government support as compared to pay rises ~ the latter of which obviously become baked-in rather than being one-offs...?

We probably need a functioning prime minister in place first to see how that shapes up..?

As we had in the '70's (and if your moniker is indicative of your age, I imagine you will remember?), wage inflation begets further wage inflation, and it rolls on, and the global inflation we have currently could no doubt also spread into, as you put it, local inflation.

So I’m imagining that government strategy on this (and let’s hope they have one!) is likely to prove quite important..?

Watch, wait and see, I guess..?

I don't have a crystal ball, nor, sadly, do I drink with Captain Hindsight, but I think that a possible takeaway from this is, as you say, that ever increasing interest rates aren't likely to do the job (other than in an illusory & temporary way?) and, therefore, they may not go as high as some fear…?

It is, however, never-the-less somewhat unsettling being invested in house builder shares right now ~ we seem to be in falling knife territory and particularly in the case of Persimmon, and though I have expressed thoughts on that previously here, to a greater or lesser extent I'm also imagining most people commenting here are already invested in this sector in one or more of the house builders and so, to some degree, we're all in the same boat...?

And no doubt with differing inclinations about whether to brass it out or cut and run….?

But thanks once again for your perceptive comment.

Strictly

If you go back to the early years of this century, a relatively small property developer, Telford, came to the stock market in 2002...

They hit the deck running..... fast....

Their first five years ROE were:
2003 46.6%
2004 47.3%
2005 25.2%
2006 32.8%
2007 45.8%
Which was surely a pretty awesome performance in anyone's book...?

It certainly was as far as Mr Market was concerned ~ he took the price to book value for Telford to over 4.0 pre-credit crunch, meaning their share price hit a peak at that time of about 430p.

But, quite understandably, Telford couldn't maintain this... and Mr Market didn't maintain his hard-on for them either...

In fact, all Telford ever did since 2007 was to continue to make money but, even so, when they sold out more than a decade later, they'd still never recovered the 430p pre credit crunch price ~ I seem to recall the takeover price was around 350p a share..?

There were more than a few unhappy bunnies in these share chats ~ Telford had been a much discussed & loved favourite, and we were all sorry to lose them from the market...

But, as Ned Kelly said, such is life...

My theme is that maybe there's something in this for Persimmon's fans...?

I mean, Persimmon have enjoyed sector leading returns on equity these last few years, with a truly impressive Usain Bolt equivalent gap between them and the rest of the pack.

And this, plus the big boy div, have both no doubt contributed to the PBV of around 3.0 that Persimmon were typically enjoying until fairly recently.

Persimmon, still, are on a PBV of around 1.4 after having their share price halved so far this year.

The thing is, 1.4 is around an overall average PBV for the house builders at large ~ albeit that obviously they do wander far above and below this over time, that's still in the ballpark average.

So, if Persimmon do fall back to more normal sector margins, in line with other house builders because, on the whole, nothing lasts forever, and if the market gets round to allocating a more typical price to book value to house builders at large, there seems the potential for a lot more upside on the share price for other house builders than maybe there is for Persimmon…?

And Persimmon have already fallen somewhat further this year than, for example, Redrow.

I make no predictions here ~ but what I've outlined above is part of what keeps me invested in other house builders but away from Persimmon...

I just consider myself to be too wussy an investor to want to take that chance...

Though I anticipate that some here will disagree with all this…?

Strictly

"I am looking to invest in house builder(s) for the long term & am respectfully looking for recommendations from those with more knowledge of this sector than myself."

...........................

Gary,

I'm not confident that you'll get any direct recommendations for investments here ~ probably a step too far anyone to give direct investingbadvice ~ but a bit of time spent scrolling back on, in particular, Bellway's share chat along with clicking on the names of any commenters you think add something to the debate (and there are a few of those here, IMO) should give you some food for thought....

As the name implies, I only invest in this sector and, for me and our investing circle, Bellway is our benchmark share...

Not for nothing is it referred to as "Ghost Dog" (you'd have to know the film, though, to make sense of that).

Strictly

"Current Net cash is c. £780m? At the end of 2008 (Sub Prime and I assume the reason for the 0.4-0.8 P/B) total liabilities were £1.6bn and Net Assets £1.55bn. Gearing 40%. As I said yesterday, it is a ludicrous comparison?"
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Paul,

I relate to your comment about relative balance sheet strength, and also note that like me you seem to pay attention to total liabilities and net (tangible?) assets and the relationship between these ~ I also focus on total liabilities as a percentage of balance sheet, rather than bothering particularly about percentage borrowings....

After all, if there's a debt it's got to be paid sometime regardless of where it sits in the balance sheet.

And while I'm not interested in Persimmon as an investment prospect for various reasons outlined in previous comments here, I am interested in them to the extent that they and Bellway have the best forty year track records of the companies I follow, and I’ve been taking a look at this today as like you I’m interested/concerned to ponder what difference relative current balance sheet strength may make given that all builders are now generally in a much better place on that front compared to the credit crunch period.

Persimmon’s average ROE long term is a couple of percent above Bellway's, but the difference in growth between them has been like a football match ~ a tale of two halves.

From 1984 to 2006, Persimmon's growth outstripped that of Bellway's by 5 to 1, mainly through numerous acquisitions.

However, since then, Bellway's growth has outstripped Persimmon's by 10 to 1.

No cigar for Persimmon, then...?

The above may not add much to the debate, but I'm looking at it as I'm concerned about how big the number is on the financial Richter Scale for the sh.tstorm that we may be going into as a nation?

Of more use might be that Bellway had recovered their peak pre-credit crunch BVPS by 2012, whereas Persimmon took two years longer, even though they didn't start their big boy divs until 2013.

The difference may well be in the relative balance sheet strengths at the time...?

Going into the credit crunch, Persimmon's total liabilities were 96% vs Bellway's more modest 65%, and the two of them are now best in class of the companies I track ~ Persimmon at 38% vs Bellway at 32%.

I don't know is how much of a difference this will make heading into the financial fray, but I’m hopeful that it will be significant...?

Strictly

rxdav & stevebt,

Having just had a quick scroll through Porsche's previous posts, I would say that he's been rather restrained here...?

Surely, the simplest thing is to just filter him/her ~ as I just have...?

Persimmon chat seems to draw the occasional "character" ~ the other one I filtered here was exstatex

Life's too short for all that b.llocks, IMO…

Strictly

Paul,

By "range trading" I'm taking it that you move between house builder shares & cash...?

For myself, in twenty two years in this game, I've remained fully invested throughout, with the exception of largely swerving the covid tsunami....

I agree that some house builder balance sheets now are very different to those of the credit crunch... by "some" I mean notably Taylor Wimps and Barratt, who were both in existential risk if they hadn't got their rights issues away back in the day and though they survived they still have some way to go for shareholder recovery.

Don't tar them all with the same brush, though ~ Bellway have always operated with a strong balance sheet and, as ever, are currently best in class.... ironic seeing as it's only Crest, of the builders I track, currently enjoying a lower PBV...

If the market was rational, you'd expect some brownie points for safety, wouldn't you, especially through these dark & uncertain times...?

I am pretty much a 100% rear view mirror investor ~ I have a lot of faith in Mathew 7.16, and all that (though, don't get me wrong ~ I certainly ain't religious..!) and, for me, the cold marble slab of truth is the numbers.

So, I don't really connect with a lot of the potential why's and wherefore's discussed by others in these share chats ~ as far as I'm concerned, it all comes out in the wash in the end with the numbers....

And on this, I pretty much disregard declared earnings, and P&L accounts generally as being great works of fiction, and instead work from balance sheet to balance sheet, calculating tangible book value per share and adjusted for dividends paid to get to the true EPS.

The great thing about balance sheets is that if you fiddle a value one year, you have to keep fiddling that value just to keep things straight ~ no “adjusted earnings” malarkey allowed..!

But of course, we can't see the future, so we have to rely on the past...

Well, at least, I do...

One thought on this land bank advantage for Persimmon, though ~ if there's less growth for the company, which there is in Persimmon’s case, at any given time the existing land bank will last longer...

Persimmon's turnover increased by only 75% from 2013 to 2019, whereas Bellway's turnover increased by 190%.

So, while I'm not suggesting that this happened, if Persimmon did happen to have a land bank bought at wonderful margins, one way to spin that out longer would be to restrict the amount they used every year...

Wouldn't it...?

Especially as, in these pages at least, no-one else seems to be picking up on the consequential lack of earnings growth…?

So, as far as the share price goes, clearly, they are getting away with it...!

Strictly

PSN have sector leading margins but how will they maintain this as they deplete their historic land bank and build out more recently acquired land?
..........................

Paul,

Persimmon have maintained sector leading margins for a decade...

I am not an investor in Persimmon, and have been watching from the side-lines waiting to see if their margin slips ~ which it hasn't so I now allow that they may just have an overall business model that gives a better bottom line..?

However, as you say, they trade at a premium to net asset value well over and above that of the other house builders, particularly the ones I am invested in, being Bellway & Redrow.

Their price to book remained at around 3.0 for years before the recent slide, and even now it's still around 1.6 against the other two who are both below par.

Almost certainly, the high PBV is driven by the big div ratio paid out as well as the high margins.

This presents two problems.

At a PBV of 3.0, two thirds of the shareholder asset value evaporates on paying the dividend ~ i.e. a 6% of book value paid as dividend is experienced as only a 2% yield.

And because Persimmon are paying out a far bigger percentage of their very impressive earnings as dividend ~ around 80% against Bellway & Redrow 33% ~ there's far less retained earnings for growth.

So while, at any given moment, Persimmon's metrics may look wonderful, their earnings per share growth is a giveaway if you pay attention to the longer term going back...

From 2013 to 2019 (let's keep this pre-covid) Persimmon doubled their EPS from 122p to 253p, whereas Bellway quadrupled theirs from 103p to 437p.

And, furthermore for me, being a wussy investor, the forty years of track record I have details of for some of these house builders shows purple patches and sticky patches for price to book values for them, some quite enduring even though the underlying performances may not have warranted these one way or the other...

And my fear is that, at some point, Persimmon reverts to a more standard PBV in line with their superior div payout on the one side but their inferior growth on the other.

That would require more or less a halving of share price from here, relative to Bellway.

And I’m no hero…

Strictly

".....................as you say they're committed to the policy at the moment so will be intersting to see how this unwinds in the coming years!!!"
.........................

PTG,

Starting with tomorrow ~ when their half time whistle is due to be blown....

Strictly

"I hold RDW as well as PSN and wonder whether PSN may adopt a shareback approach given current SP?"
.............................

PTG,

Bear in mind that, in all likelihood, the other factor (apart from their higher ROE) that drives Persimmon's significantly higher PBV, relative to other house builders, is that they pay out around 80% of earnings in dividend rather than only 33% as with Redrow & Bellway.

And, based on the high PBV, this big div pay out obviously hurts investors ~ given that, for much of the past few years, when Persimmon have been on a PBV of around 3.0, it’s been a matter of a pound of div to investors costing three pounds in underlying retained value ~ though over the medium term this has been masked by Persimmon’s impressive relative share price performance.

But anyway ~ that's the corner that Persimmon have painted themselves into, given that it’s a legacy from the time of King Jeff and the now notorious directors’ bonus scheme.

The corner in question being: how do Persimmon pull back on the very high dividend ratio without harming the share price given investors’ expectation..?

So, until then, this only leaves them around 20% retained earnings for growth compared to Redrow's 67% retained earnings.

So, while I'm not making any predictions here, it seems to me that share buy backs make much more sense for Redrow at current prices than they do for Persimmon as they enhance EPS while also swerving messing with investor expectations ~ as would likely be the case if they, instead, significantly increased the dividend pay out...?

Not joining Persimmon in their corner, in other words…

Especially as, up to now, Redrow have been buying back shares at below book value.

If Redrow were to liquidate all balance sheet assets at exactly balance sheet value, and if they continued to buy back shares with all the proceeds, and if the share price didn't move as a consequence (these are, of course, all very mythical “ifs”), they could, in theory, end up with just remaining one share in issue worth rather a lot of money...!

Don't hold your breath on that, though...

Of course, I could be completely wrong about this and, instead, tomorrow, Persimmon proudly announces a share buy-back programme…? ??

Strictly