As ever with housebuilders, we return to the same question: when and how could it all go wrong? Housing is a cyclical industry and one day the cycle will turn, but it is not immediately obvious why or when. One constraint is the cost of labour and of employing subcontractors, but, according to Pete Redfern, the chief executive of Taylor Wimpey, the industry seems to be coping well enough.
Labour costs are expected to rise by 3 or 4 per cent this year, but this is below the 5 per cent at which the cost of houses has been rising. Taylor Wimpey seems able to continue to increase the number of homes it builds by the 7 per cent they were up last year.
There is little sign of land price inflation — the company and its large peers have the advantage of access to capital to invest in this, which is holding back the small, privately owned operators. Economies of scale will allow margins to continue to rise, and they are running at above 20 per cent, a record for the company, if about in line with the other quoted builders. Taylor Wimpey is seeing a return on assets of above 25 per cent, and cash is piling up.
What would disrupt the cycle and send the industry into reverse again would be a prolonged rise in interest rates, but this is nowhere on the horizon. Mortgage availability is as high as ever, as more lenders enter the market. The government’s autumn statement promised more support for the first-time buyer, even if there is as yet no detail. This can only be favourable for the sector.
The company ended the year with net cash of £225 million, after paying £308 million to investors in the form of dividends. That will grow to £357 million this year, including a £300 million special payment.
A decision on what special dividend will arrive next year will not be taken until the summer, but the reckoning has to be that there will be another.
The shares, up 1¼p at 195p, have been marking time since the autumn. The extraordinary bull run for the sector led to some nervous profit-taking. On the promised payments for this year, Taylor Wimpey shares yield 5.5 per cent, which is a good enough reason to hold them. The party isn’t over yet.
Total dividends in 2016 £357m
MY ADVICE Buy long term
WHY There is no sign that the long boom in housebuilding
is coming to a close, while the dividend yield on the shares
is attractive and sustainable
If there was a cavil about Robert Walters’ year-end trading update, it was the slowdown in the fourth quarter in Britain. Net fee income rose by 13 per cent in the third quarter and by just 5 per cent in the fourth. This was largely because of a cessation of hiring in the financial services sector.
The upset on the Chinese stock market last summer meant that investment banks in the UK were not hiring as much. This was to be expected and probably will reverse in due course. There is also an understandable lack of hirings in the public sector, something seen elsewhere in the recruitment sector.
Otherwise the company was firing on all cylinders and was strong in Asia Pacific in the final quarter, despite the problems in China, raising fee income by 11 per cent in constant currency terms. Europe was even stronger, up 17 per cent. Even France performed well — the company says that long-awaited changes to working practices are coming through and that employers are hiring again.
Across the group, then, fee income was ahead by 10 per cent in constant currency terms in the fourth quarter, or 12 per cent over the year. This was the eighth consecutive quarter of double-digit fee income growth; the company is geared up, in terms of headcount, to cope with any further upturn.
Global macroeconomic trends must be a concern, but the shares, up a penny at 363p, have come back from a high of almost 480p in the summer. On 16 times’ this year’s earnings, they look good value given the prospect of future cash returns.
12% rise in annual fee income
MY ADVICE Buy long term
WHY Company is well placed for future growth
Investors in Xchanging have until Friday to accept the offer from Computer Sciences Corporation. They should do so.
The initial approach, from Capita, was pitched at 160p. This proved to be a serious undervaluation for a fundamentally sound business, if one with a chequered record, and tempted out other buyers for Xchanging, which provides back office software.
CSC emerged with a 190p offer in early December. The company was in talks with another trade buyer, Ebix, of the United States. A statement yesterday poured cold water on any hopes that a rival, higher offer would emerge. Ebix has not confirmed that it would be able to top that 190p and Xchanging says that, given the “very limited engagement” with the potential offeror, there is little certainty another offer will emerge.
CSC has acceptances from 57 per cent of the share capital and the first closing date is this Friday. The bidder could walk away if acceptances did not top 75 per cent, or it could extend the offer period, which is likely. This is the only game in town and Xchanging’s share price, off 1¾p at 190p, suggests the offer will succeed.
190p value of CSC bid
MY ADVICE Accept offer
WHY There seems no likelihood of a higher one
And finally ...
It is now only a fortnight until Royal Dutch Shell investors get to vote on the takeover of BG Group and the gap between the terms on offer and the BG share price is narrowing. I believe that the deal is going to go ahead and that BG shares look like a cheap way into Shell, one of the highest-yielding stocks on the market. Developments over the weekend would seem to confirm this. That gap, 85p at the end of last year, is now a bit over 60p. Mind you, if the deal fails, that BG price will plummet.
