By Serkan Unal
The U.S. housing market has seen robust activity, with housing starts, sales, and prices recovering at healthy clips. The outlook for housing is also optimistic, with starts forecast to grow at an annualized average rate of 26% through 2014, based on the forecast from the National Association of Home Builders. In January 2013, home prices saw their biggest annual increase in six-and-a-half years and are now projected to appreciate 6% for the year as a whole, according to researcher CoreLogic. As cited by Bloomberg, global head of corporate bond portfolios at PIMCO, Mark Kiesel, says that "the U.S. industries tied to housing are likely to grow about four times as fast as the economy, making them top picks for investors." But, do housing-related stocks still represent good buying opportunities at current prices?
Following the extended rally in homebuilder and housing-related stocks over the past year, the overall sector has become expensive, trading at 20.6x trailing earnings. Valuations of many individual stocks in the sector are even more excessive. As most of the positive news has already been priced into the valuations of the sector's stocks, opportunities for inexpensive investments have become limited. For dividend investors in the sector, here is a closer look at five housing-related stocks yielding more than 2.0%. Among these five, MDC Holdings Inc. (MDC), Williams-Sonoma Inc. (WSM), and The Home Depot, Inc. (HD) trade at elevated multiples, which warrants caution about entering into new positions at their current price levels. On the other hand, Weyerhaeuser Co. (WY), a lumber products REIT, and Stanley Black & Decker, Inc. (SWK), an S&P Dividend Aristocrat, look like attractive longer-term plays.
MDC Holdings Inc. is a small builder of affordable housing. It pays a dividend yield of 2.7% on a payout ratio of 57% of the current-year EPS estimate. Back in December 2012, the homebuilder paid a special $1.00 dividend in lieu of its regular dividends payable in 2013. The stock has gained 42% over the past 12 months and looks ready to take a breather. At the current price, the stock is trading at 29.1x trailing and 20.0x forward earnings. The company has reported operating profit over the past four consecutive quarters, with net new orders surging 50% and revenues from home sales up 43% from 2012. Analysts forecast an annualized 51.4% growth in EPS for the next five years. The outlook may be rosy, however, these expectations could easily disappoint if higher interest rates dent the housing demand and the demand for the company's mortgage finance services. Moreover, the company has been stepping up land purchases, expecting increasing land prices to exert the pressure on profitability. Last quarter, MDC was popular with Citadel LLC's Ken Griffin.
Williams-Sonoma Inc., a specialty home furnishings retailer, pays a dividend yield of 2.4% on a payout ratio of 45%. The company's dividend has grown at a five-year CAGR of 13.7%. Recently, WSM hiked its dividend by a whopping 40.9% and authorized a share repurchase plan worth $750 million for the next three years. At current prices, the company's shares are trading at 19.8x trailing and 18.5x forward earnings, which compares to an average multiple of 19.6x over the past three years. WSM has reported three consecutive quarters of accelerated revenue growth and four quarters of double-digit EPS growth. Its outlook calls for revenue growth in the mid-to-high single-digits and EPS growth in the low double-digits to mid-teens. The company's FY2013 guidance beat analyst estimates, which, nevertheless, was reflected in a recent jump in WSM's stock price. Aside from the housing recovery, a positive impetus to WSM sales comes from innovation in the form of new products and the general trend of healthy living, including the increasing preference for home cooking. While the stock looks poised to continue its upward thrust in the near term, it no longer appears undervalued. Last quarter, WSM was popular with Robert Joseph Caruso of Select Equity Group.
The Home Depot, the largest U.S. home improvement retailer, is another stock that has been flying high on the wings of the housing recovery. The stock has rallied some 39% over the past 12 months, hitting its 13-year high recently. The stock is currently trading at 22.7x trailing and 19.8x forward earnings, which seems to be fair valuation at current price levels, on par with its industry's. HD's performance has been propped up by the housing recovery, with EPS expanding 21% in 2012 from the year earlier. The retailer also got a boost from the clean-up and rebuilding efforts in the aftermath of Hurricane Sandy. Looking ahead, HD's FY2013 guidance includes a 2% growth in sales and a 12% growth in EPS, accounting for an increased share repurchase activity. In fact, the company has approved a new $17 billion stock repurchase program that will be in effect through the end of fiscal 2015. While share buybacks will buttress HD's EPS growth, the company's stock price at the current level reflects a long-term CAGR of 14.5%. HD recently boosted its dividend by 34%. It is currently yielding 2.2% on a payout ratio of 44%, and is one of billionaire Ken Fisher's major holdings, based on the fourth-quarter 13F disclosures.
Weyerhaeuser Co. is a lumber and homebuilder REIT that is heavily leveraged to the housing market. It is likely to benefit from the higher demand and prices of domestic and export logs and pulp as well as from lower Canadian lumber supplies despite the higher U.S. demand. Its outlook is rosy, as analysts forecast lumber prices to hit new record highs this year and next. The recent upturn in housing has helped this REIT increase both sales and funds available for distribution (FAD). According to Citi analysts, as reported by the Barron's, WY's strong FAD growth could enable the company to boost its distribution 50% by 2014, assuming a payout of 75% of FAD. Still, all these positive developments are reflected in WY's current stock price, which should make investors cautious about entering new positions at these levels. As lumber prices see some pressure to correct after a year-and-a-half long surge, WY's stock prices could also moderate somewhat. Thus, long-term investors should look for entry points at lower WY prices, as this REIT still represents a good long-term play on timberland assets. It is trading at 17.6x EV/EBITDA; RBC Dominion Securities projects it 2013 EV/EBITDA at 15.2x. Value-oriented hedge fund First Eagle Investment Management held nearly $522 million in WY stock at the end of last quarter.
Stanley Black & Decker, Inc. is a power and hand tools company, with a remarkable history of dividend growth. It is an S&P Dividend Aristocrat with 45 consecutive years of dividend increases. The company has a dividend yield of 2.4%, payout ratio of 36%, and five-year annualized dividend growth of 8.2%. The company is leveraged to both residential and non-residential construction, the outlook for which is improving with a strengthening economy. SWK posted estimates-beating revenues and EPS in the previous quarter, as construction and Do-It-Yourself [DIY] segments grew strongly, offsetting the weakness in the security and industrial business. Acquisitions have also been adding to growth. However, the company guided 2013 EPS below estimates, dragged lower by the underperforming security and industrial segments. SWK's stock has increased 5.2% over the past 12 months, and it currently trades at 15.6x trailing and 14.7x forward earnings. While not inexpensive, the stock could move higher on any signs of a revival in SWK's security and industrial segments, while the construction segment continues to lend support. Analysts forecast SWK's long-term EPS CAGR to 11%. Legg Mason Capital Management (see its top holdings) reduced its SWK stake last quarter, but the hedge fund still owns some 1.3 million shares of the company.