Share pick for 2020: Redrow
Improved prospects for the housebuilding sector driven by more clarity on Brexit means it is time to buy Redrow (RDW) which has quality earnings and a strong cash position.
The landslide victory for the Conservatives in the 12 December General Election has created a measure of political certainty, in the short-term at least, which should be supportive to the housing market. This should allow housebuilders to increase asking prices, thus mitigating a rise in build costs.
The robust dynamics behind residential property, namely a lack of supply to meet demand, remain in place and mortgages remain cheap.
The Tories have made some positive noises about supporting the sector, including finding a new way to support home ownership once the current Help to Buy scheme expires in 2023.
And, although it was not in the party’s manifesto, prime minister Boris Johnson has previously discussed cuts to stamp duty which could provide a further boost to transactions.
Redrow’s focus on building premium quality homes means it is more exposed to the higher end of the market but also should help it steer clear of the build issues and poor customer service which have affected some of its peer group, notably Persimmon (PSN).
The company is also well aligned with the higher levels of investor and consumer focus on sustainability, with commitments to source 90% of its products locally and ensure 100% of its timber is responsibly sourced.
And unlike some of its rivals, who are taking their foot firmly off the accelerator, Redrow is still looking to grow, opening up its Thames Valley division in 2019 and with plans to open new outlets in 2020.
Its price-to-book value of 1.4 times is lower than the peer group average of 1.7, making the shares particularly attractive from a valuation perspective.
The company offers generous dividends; based on consensus estimates the shares offer a dividend yield of 6.2% underpinned by strong cash generation and the net cash which is piling up on the balance sheet.
The next catalyst for the share price is likely to be the results for the six months to 31 December published on 5 February 2020 which may offer some commentary on the prospects for the key spring selling season.