Housing market has been depressed for several years. Recently, however, it has started to show early signs of a nascent recovery in market activity. Housing starts rose more than 15% in the first quarter compared with the same quarter a year ago. Remodeling activity has also been robust, rising 23% in February compared to the same month last year, according to Buildfax. Value of residential construction put in place is likewise on track to improve gradually. In response to these early indicators of the market's recovery, some stocks, including those of homebuilders, have risen substantially over the past several months. A few others are yet to benefit from the anticipated improvement in the housing market. While the housing market's fortunes largely depend on strong employment growth, which is still elusive, here are four dividend plays that will gain from a rebound in housing activity once it takes a firmer hold.
Stanley Black & Decker Inc. (SWK) is a $12 billion manufacturer of tools and hardware, including hand and power tools. The stock is up more than 45% since September 23, 2011. Still, it is down almost 15% from the recent high reached in mid March. The company has a dividend yield of 2.30%, which compares to an average yield on its industry peers of 2.0%. The company's competitors, including Kennametal (KMT) and Snap On (SNA), are currently yielding 1.40% and 2.2%, respectively. Stanley Black & Decker has a dividend payout ratio of 41%. The company has a P/E ratio of 13.2, below the industry's average of 20.5, and a forward P/E of 11.4, about on par with its peers on average.
The company reported that housing and home improvement markets "appear to be firming," which will have a positive effect on the company's top and bottom lines. The recent sales trends in power tools and outdoor products appear to be robust and not merely related to a warm weather-induced increase in activity. Ken Heebner of Capital Growth Management seems to agree that there are better days ahead for Stanley Black & Decker. He added 1.25 million shares to his portfolio in the first quarter of 2012, at an average price of $70.24 a share, above the current stock price of $69.5 a share.
MDC Holdings (MDC) is a $1.3 billion homebuilder and provider of mortgages to its housing clients. The company's stock has jumped 81% since October 3, 2011 and continues to rise with a bullish momentum. The stock has a dividend yield of 3.5%, which is well above the industry's average yield of 1.0%. Most of its homebuilder competitors do not pay any dividends, including Standard Pacific (SPF). Peers Ryland Group (RYL) and Lennar (LEN) pay dividends with small 0.5% and 0.6% yields, respectively. MDC Holdings is expected to return to profitability this year, but its forward P/E of close to 70 is almost double the industry's average forward P/E.
The company significantly beat earnings estimates in the first quarter, posting $0.04 a share compared to the consensus estimate of down $0.16 a share for the quarter. The company has reported improvement in closings, new orders and backlog. New orders and backlog have jumped about 50% year-over-year. Notwithstanding this improvement from the severely beaten-down levels, the expectations about the company's prospects seem to be exaggerated, judging by the sky-high forward valuations. Still, this is contrary to the opinion of Guggenheim Securities which upgraded the stock from neutral to buy on May 14, 2012.
Whirlpool (WHR) is another company that stands to benefit from the anticipated stronger rebound in the housing market. This $4.7 billion maker of household appliances has seen lower sales of its products due to weak household formation in recent years. The company's shares have increased almost 26% from the beginning of the year, although they are down 23% from the recent peak of $78.82 a share in mid March. The current yield on Whirlpool's stock is 3.2%, which is 150 basis points above the industry's average. The company's key competitor, Electrolux AB (ELUXY.PK), does not pay any dividends. Whirlpool has a dividend payout ratio of 39%. The company is attractive on valuation as it is trading at 7.4 times its trailing earnings, compared to the industry's P/E of 20.5. The company's forward P/E is 9.6, below the industry's ratio of 11.
The company's revenues and earnings are still hemorrhaging due to weak appliance sales. The drop in household formation has adversely affected the appliance maker's market prospects. Now that home prices have reached a bottom according to some indicators, housing formation is expected to improve, albeit moderately. Home building recovery will thus have a positive impact on the company's operations going forward. Ken Heebner seems to share the enthusiasm about the growth prospects of Whirlpool. In the first quarter of 2012, he bought 1.82 million shares for his portfolio at an average price of $62.56, above the current price of $60.5 a share.
Home Depot (HD) is another company that will gain notably from the recovery in the housing market. This $74.5 billion company, the world's largest home improvement retailer, has already seen its stock price soar with the expectations of a budding recovery in home construction and improvement. Home Depot's stock price has jumped nearly 70% since mid August 2011. In recent weeks, the stock has fallen more than 8% from May 2, 2012 high of $52.71 a share. The Home Depot stock has a dividend yield of 2.38%, which is only 30 basis points above the yield in its industry. Its peers, such as Lowe's (LOW) and Wal-Mart (WMT), have dividend yields of 1.94% and 2.70%, respectively. The company has a dividend payout ratio of 42%, about on par with the industry. The company's stock seems to be fairly priced with the current and forward P/Es of 20.3 and 17, slightly above the industry's ratios of 19.4 and 16.8.
Home Depot reported its earnings on May 15, 2012, showing increase in global sales of 5.9% year-over-year on the quarter ended April 29. For comparison, same-store sales in the United States alone increased 6.1% over the same period. The increase is still less than anticipated by Wall Street analysts. It is likely that sales so far have been less robust than expected because of weaker sales of big-ticket merchandise. Still, the company raised its sales and earnings forecast for the year, based on the anticipation of a pick-up in sales later this year. Nevertheless, the raised guidance will miss analysts' forecast by two pennies. Aside from missing analysts' estimates, Home Depot's stock seems to have already priced in the housing recovery and is currently valued in line with the industry. Given its recent run-up in prices, now may not be the best time to buy this stock. It should be noted, however, that, in the first quarter of 2012, Ken Fisher of Fisher Asset Management purchased a small stake in Home Depot at an average price of $43.56 a share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.