Berkeley buyback plan reassures investors but it does raise questions too

House builder Berkeley’s shares are up 4% today.
2 December 2016

This occurred after it announced:

  • A strong first-half earnings figure

  • A reaffirmed profit goal

  • A new five-year earnings target

  • A possible switch from dividend payments to share buybacks

Russ Mould, investment director at AJ Bell, comments:

“After its demotion from the FTSE 100 to the FTSE 250 in the September reshuffle, Berkeley has offered reassurance following September’s disappointing update. Although reservations are down by around 20% and forward sales have slipped 11% to £2.9 billion, management has reaffirmed its confidence in the future in three ways:

  1. “First, by saying Berkeley is on track to meet its target of £2 billion in pre-tax profit between 2015 and 2018

  2. “Second, by introducing a new target of £3 billion in pre-tax profit between 2016 and 2021. Although this implies a drop in the annual profit run rate from around £750 million a year to £500 million a year from 2019, that figure looks to exceed consensus analysts’ forecasts.

  3. “Third, by sticking to its plans to return £10 a share to investors by September 2021 at the rate of £2 a year (a total return of some £2.2 billion, compared to the company’s £3.5 billion market capitalisation).

“However, the company has refined its cash return plan, by reserving the right to a combination of share buybacks and dividends rather than dividend payments alone.

“Not everyone will welcome this for two reasons:

  1. “Buybacks are treated as capital gains not income so this may suit the big institutional funds which do not pay capital gains tax, but for private individuals the best cash return mechanism will depend on their personal circumstances and which tax brackets apply to them.

  2. “Berkeley’s management argues that history shows its shares can become materially undervalued at certain points of the economic and stock market cycle. While long-term share price movements show this is undoubtedly true, it is surely management’s job to manage the assets of the business to extract the best risk-adjusted returns for shareholders – and not to manage the share price.

“The Berkeley argument it will be able to call the cycle correctly and buy stock at the right time does raise a few doubts.

“But if anyone can get it right, Berkeley probably can. Chairman Tony Pidgeley’s record in calling the property market is outstanding as he has been a contrarian buyer of land more than once during deep downturns.”

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