No dividends? No problem. Vistry's shares surge post results

Axing dividend payments is a hard sell for shareholders, but Vistry (VTY) seems to have pulled it off. The housebuilder's share price jumped 9 per cent on the morning of its results for the last calendar year when it announced a new £100mn buyback to replace the dividend it scrapped last autumn.

It comes after the housing developer cancelled the 2023 payment in September in favour of a £55mn buyback, which it said was due to the market "significantly" undervaluing the company. The share price has risen since then, with the housebuilder now priced at a premium to its net assets rather than a discount. 

Despite this rally, the undervaluation argument still holds. Vistry trades at a lower price to consensus forecast earnings ratio for 2024 and 2025 (13.5 and 11.6 times) than most of its FTSE 350 sector peers, many of which have posted earnings and revenue slumps due to the interest-rate-driven market downturn. 

By contrast, Vistry's figures look much better, bolstered by its wholesale pivot from the private market to bulk-selling partnerships with councils, social housing providers, and private landlords. The group has been gearing up for this move for a while, with some commentators suggesting that it is what motivated its purchase of Countryside in 2022, but the timing has no doubt helped. Just as the private market sank, the group revealed a plan to decouple from the private market.

However, we have some reservations about the transparency of this model, with all of the FTSE 350 housebuilders refusing to give a complete list of who their social housing provider buyers are. So, while earnings and revenue are rising, we don't know where the money comes from. 

This concern is doubly pressing because, so long as there is no dividend, some might argue that the developer is purely a growth play. Consensus forecasts predict the payout will return at a 47p a share level by the end of this year. For its part, Vistry has said it "intends to sustain the pursuit of two times adjusted earnings ordinary distribution cover in respect of a full financial year", but that's not a firm guarantee.

The final big question for management is whether debt could hamper growth. While many of its peers have hundreds of millions in net cash to invest in the housing recovery, Vistry is in no such position. Then again, its performance means the need for a 'recovery' is less acute. Fundamentally, this is why we remain bullish on the stock despite the 25 premium to net assets. Buy.

Last IC view: Buy, 913p, 11 Sep 2023