UK Markets open in 5 hrs 28 mins

Dividend alert! I think this high-yielding income hero is too cheap for ISA investors to miss

Royston Wild
Stack of new bank notes

Is Bellway (LSE: BWY) a big-yielding share to be avoided? The price slump that accompanied the release of full-year results this week would certainly appear so.

But don’t be alarmed, I say. Sharp selling activity was simply a reflection of investors booking profits following meaty price gains in the run-up to Tuesday’s release (the housebuilder charged to its highest since January 2018, above £35.30 per share before retracing). Indeed, those latest set of financials have reinforced my already-bullish take on the business.

Home sales booming

So what’s so great about Bellway’s update? As well as reporting an 8.6% revenues improvement in the fiscal year ending July, to £3.21bn, and a subsequent 3.4% rise in pre-tax profits to £662.6m, the construction colossus confirmed conditions have remained robust since then.

In what it described as “a positive start to the new financial year,” Bellway has seen the weekly reservation rate during the nine weeks to September 29 rise 4% year-on-year to 183 homes.

No wonder the business said: “This, together with a strong forward order book, provides a solid platform from which to deliver further, yet more moderate volume growth in the year ahead.” Indeed, the company has plans to build 13,000 homes per year over the medium term. To put this into context, Bellway built a record 10,892 properties in the last fiscal year.

And if latest home sales data from UK Finance is to be believed, the FTSE 250 firm is quite right to be so optimistic. According to the body, there were some 35,010 new first-time buyer mortgages completed in August, the highest total since before the financial crisis of over a decade ago (August 2007, to be exact).

Dividend darling

It’s clear total homebuyer activity in the UK has been damaged by the uncertainty Brexit has created and this is having a marked effect on the builders. Indeed, Bellway today cautioned that a lack of house-price inflation, in combination with rising build costs, means “the reduction to a consistent, underlying operating margin will be more pronounced.”

But, as last year’s results showed, conditions should remain supportive enough for the business to still create decent profits growth. There simply aren’t enough homes in the UK to meet the demands of a rising population and there’s no reason to expect this to end, given a disjointed government housing policy.

The outlook for Bellway and its peers remains so robust that the builder felt confident enough to raise the full-year dividend for fiscal 2019 to 150.4p per share, up 5.2% year-on-year. And City analysts believe there’s scope to raise it again to 154.9p in the current period, resulting in a gigantic 4.8% yield.

I would argue, though, that its strong trading picture and the robustness of its balance sheet (net cash more than doubled to £201.2m last year) means that, as was the case in fiscal 2019, the full-year dividend could actually blast past broker expectations.

All things considered, then, I reckon Bellway is a brilliant buy for those seeking big dividends now and in the future. And a low forward P/E ratio of 7.4 times fails to reflect its exceptional profits prospects.

More reading

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019