In these times it is tempting to give up trying to make any sense of the markets. Take the housebuilders, several of which are on guaranteed dividend yields that would seem to make them an absolute steal. Or take Redrow, whose strategy is to build the business rather than shovel large amounts of cash to investors, although the shares yield a respectable 3.3 per cent.
In the general rout in the sector, they have come back by 30 per cent since the middle of last month, though they rose 8½p to 303¾p in yesterday’s market recovery. Yet the company, which generally does not go in for frequent trading updates, has had to push out one because trading is going so well that analysts’ forecasts are too low for the financial year just ending.
The shares, though, are selling at or about the net asset value, which has probably not been seen since the depths of the financial crisis. The market appears to be factoring in some sort of collapse in the housing market, yet the level of customer demand since the referendum vote seems to continue unabated.
These are uncertain times and that market may well go into the meltdown. It seems implausible. The update shows the company moving ahead on all fronts. Specifically, the value of private reservations is up by 46 per cent year-on-year to a record £1.56 billion, while the order book is 50 per cent higher. Plenty of further growth is booked in.
Redrow is now largely out of a couple of high-value central London sites that had suffered a slowdown in interest in recent months and is continuing to build in less expensive suburban locations where there is plenty of demand.
Obviously, a slowing UK economy would put a bit of a brake on demand anywhere, but we are still not building as many houses as we need, nor are we likely to. The industry is in a very different position than when the market last turned down, in 2008, not weighed down by huge debts and in need to go to investors for rescue rights issues.
However you look at it, Redrow shares are cheap, selling on an earnings multiple of 5.5. If you think the world is coming to an end, avoid. If you want a good income, go elsewhere in the sector. If you want a good exposure to the housing market at a good price, buy now.
My advice Buy
Why Unless we are heading for some huge housing crash, the shares are cheap, having fallen to about level with the net asset value
Ocado
Until yesterday’s 18¾p bounce to 226¾p after halfway figures, shares in Ocado were again approaching that 180p flotation price in July 2010. They have been lower; indeed, they have been considerably higher, peaking at above 600p in early 2014. None of those prices would seem to have anything to do with events in the real world, as ever.
Sales may have tripled since that float to an expected £1.3 billion this year, but margins are still slight and will remain so until Ocado can scale up further. This could be a long process. The third distribution centre, at Andover, starts trading this autumn. There is a fourth planned at Erith, which may or may not have Wm Morrison as a customer (negotiations are continuing and this would be the best outcome).
The new centres allow Ocado to refine its technique in building more and are thus important to the next hurdle, that long-awaited deal to provide its technology to retailers on the Continent. I have no idea when or if that might arrive. This makes the shares, given the lack of any meaningful earnings multiple, a completely unknown quantity, although they look more affordable. For gamblers only, then. As ever.
My advice Avoid
Why Sharex are cheaper but price still hard to understand
Legal & General
One wonders how many other insurers will be forced to put out statements of the blindingly obvious: that the fallout from the Brexit vote does not in any way threaten balance sheets that in the spring were seen by some as erring on the overcautious side.
First Aviva on Monday, then Legal & General yesterday have indicated this, with the tacit rider that the dividend income that is one of the best reasons for holding the shares is in no way at risk. L&G said yesterday that the Solvency II coverage ratio, the most important number because it is the difference between what is in the bank and potential liabilities, stood at 156 per cent on Monday night. This is the measure under the new regime that governs the sector; it came in at 169 per cent in March, when the insurer announced 2015 figures.
It will be a bit better again after yesterday’s recovery. It would take a pretty extraordinary market collapse to see it fall even to the unofficial target that L&G is reckoned to have of 140 per cent, let alone approach the danger zone.
The insurers took some stick at the start of the financial crisis for not keeping the market informed and plainly are being careful to do so now. Like the housebuilders, they are in a much more stable position today than they were then.
L&G shares have been hit like all the rest since Thursday. They bounced 13p to £1.78 after yesterday’s reassurance. The forward dividend yield is still a healthy 8 per cent, which means, like Aviva, they look oversold.
My advice Buy
Why Dividend yield at this level is hard to resist
And Finally...
Funds such as NextEnergy Solar are among the safer havens in these markets because they generate funds from long-term energy supply contracts that provide reliable dividend income and a good yield. NextEnergy is the biggest quoted renewable energy fund on the market by installed capacity and has released results that show the amount generated continues to run ahead of budget. It is targeting total dividends for the year of 6.31p to be paid in quarterly instalments; this indicates a forward yield of 6.6 per cent.
