Interactive Investor

Bears still in the driving seat at Bellway after half-year results

29th March 2022 08:09

Richard Hunter from interactive investor

Despite an attractive dividend yield, investors have fallen out of love with Bellway. Our head of markets looks at the latest results and also runs through latest developments both here and on Wall Street.

A brief inversion of the yield curve threatened to upset sentiment Monday, but stocks fought back to end in positive territory.

Nonetheless, although the inversion was brief, it underlines some concern among investors that if the Federal Reserve was to tighten monetary policy too quickly and aggressively in its efforts to combat inflation, it could induce a recession. However, this is not currently the central case of market thinking, rather more a warning that over-tightening is now firmly on the radar of investors.

Ongoing hopes of conciliation between Russia and Ukraine and some strong economic data have led to gains over recent sessions, with indices attempting to claw back some of the losses incurred earlier in the year. It is a slow grind towards recovery, but there is progress, with an ongoing perception that value stocks remain cheap in comparison to growth. The Dow Jones currently stands down by 3.8% in the year to date, the S&P500 4% and the Nasdaq 8.2%.

The wave of guarded optimism on both Wall Street and Asia has washed through to UK shores in early trade, despite the ongoing travails which investors are facing. The boost in early exchanges continues the trend of the FTSE100 as a relative outperformer, and the index remains ahead by 2% in the year to date.

Some weakness in sterling over the first quarter – with overseas earnings being a key factor among its constituents - has added to a generally positive cocktail for the index, with the elements of defensive stocks and exposure to commodity strength providing further pillars of support.

Building growth at Bellway

Following an aggressive land acquisition programme which positions the company for strong future growth, housebuilder Bellway (LSE:BWY) has delivered an update which ticks all the boxes on the key metrics.

Net cash has decreased slightly over the half year ended 31 January given the company’s general buying activity, while the spectre of cost inflation has largely been offset by rising house prices. Its volume output is ahead of not only last year but also pre-pandemic levels, while there are also improvements to its reservation rate, which is up 5.8%, and its underlying operating margin, which has improved from 17.3% to 18.7%.

Bellway’s confidence in its prospects is amply demonstrated by a rise of 29% to the interim dividend, which implies a yield of 4.9%, a clear invitation to income-seekers in the current environment. This has been underpinned by a revenue rise of 3.5% and a pre-tax profit hike of 9.8%, with the outlook remaining equally upbeat. The forward sales order book is ahead by 24% (and by 30% against pre-pandemic comparisons), with volume growth of around 10% and stable operating margin likely to be maintained.

Unfortunately, and with the sector as a whole, the bears have been in the driving seat. Cost inflation, pressure on household incomes, rising interest rates and supply chain constraints have all clouded prospects, and Bellway is no exception.

Over the last year, the share price has declined by 25%, as compared to a dip of just 1.7% for the wider FTSE250 index. Even so, and with some of the larger players in the industry, the general view of the company’s prospects is optimistic, with the market consensus of the shares continuing to come in at a "strong buy".

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