M.D.C. Holdings (MDC) is a buy for the total return and dividend income investor. M.D.C. Holdings is among the largest homebuilders in the United States and has an increasing owned backlog of over 17,000 lots to develop and options on another 7,000.
The company has steady growth and has the cash it uses to develop new properties and homes for the average home buyer. The lower interest rates give a tailwind to the company business. The Fed has indicated that they intend to keep interest rates low for at least a year or maybe two.
As I have said before in previous articles.
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article “The Good Business Portfolio: Update to Guidelines, March 2020”. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keeps me ahead of the Dow average.
When I scanned the five-year chart, M.D.C Holdings has a good chart going up and to the right for 2016, 2017, and 2019 in a strong solid pattern. It is a cyclic company and was down in 2015 and has recovered well in 2019 from the flat year of 2018. 2020 was doing good until the pandemic hit, then it went down like a rock in water but has recovered nicely in the past six months. The PE is low at 11, and the earnings growth looks good at 10%, making MDC a strong buy.
Fundamentals and company business review
The method I use to compare companies is to look at the total return, as shown from my previous articles in the section below.
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the Good Business Portfolio’s objective. My total return guideline is that total return must be greater than the Dow’s total return over my test period. I chose the 58-month test period (starting January 1, 2016 and ending to date) because it includes the great year of 2017 and 2019, and other years with fair and bad performance.
M.D.C. Holdings’ total return of 160.84% is great compared to the Dow base of 59.29%, making it a great investment for the total return investor. Looking back five years, $10,000 invested five years ago would now be worth over $23,700 today. This gain makes M.D.C. Holdings a good investment for the total return investor looking back and has future growth as the United States home sector continues to grow with the low interest rates.
Dow’s 58-month total return baseline is 59.29%
M.D.C. Holdings does not meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield. M.D.C. Holdings has an above-average dividend yield of 2.6% and has increased for four years of the past ten years, making it a fair choice for the dividend income investor. The dividend was last increased in January 2020 for an increase from 0.30/Qtr to 0.33/Qtr or a 10% increase. The five-year average payout ratio is low, at 28%, and very safe. After paying the dividend, this leaves cash remaining for increasing the home development business of the company. The dividend growth rate for the past five years is good for the income growth investor.
I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter on July 28, 2020, M.D.C. reported earnings that beat expected by $0.48 at $1.31, compared to last year at $0.86. Total revenue was higher at $887 million, beating by 21% year over year and beating expected revenue by $80 million. This earnings report was fantastic with bottom-line beating expected and top-line beating compared to last year. The next earnings report will be out in October 2020 and is expected to be $1.22 compared to last year at $0.79, a strong increase. Looking ahead at the January earnings report, it looks like another strong increase of $1.75 compared to the previous year of $1.42. This strong growth cycle is an opportunity to buy a company while it can grow for at least the next two years, with the Fed having low interest rates.
I only like large-capitalization companies and want the capitalization to be at least greater than $10 billion. M.D.C. Holdings fails my rule. M.D.C. Holdings is a small-cap company with a capitalization of $3.1 billion. Its 2020 projected operating cash flow at $70 million is good, allowing the company to have the means for growth. Small-cap companies like M.D.C. Holdings have the advantage of growing faster than large-cap companies, which is shown by the growth over the last year
M.D.C. Holdings’ S&P CFRA rating is four stars or buy with a target price of $49.0. M.D.C. Holdings’ price is at the target and has a low forward PE of 10, making it a buy investment at this entry point. MDC is my next new company for my portfolio as I am selling my position in Ingersoll Rand (IR).
I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The three-year forward S&P CFRA CAGR of 10% beats my guideline requirement. This future growth for M.D.C. Holdings can continue its uptrend, benefiting from the continued strong growth of the United States economy and the strong housing market.
One of my guidelines is, would I buy the whole company if I could. The answer is yes. The above-average dividend makes M.D.C. Holdings a good business to own for income, and the future estimated growth beats my requirement of 7%. My portfolio likes to embrace all kinds of investment styles. Still, it concentrates on buying businesses that can be understood, make a fair profit, invest profits back into the business, and generate a good income stream. What makes M.D.C. Holdings interesting is the increase in orders and the increased margin that will give good growth going forward. It has reported sales for August-September 2020 months in advance of earnings with a sales growth of over 70% with 2,477 units sold.
M.D.C. Holdings is one of the largest homebuilding and financial services companies in the United States.
As per data from Reuters:
“M.D.C. Holdings are engaged in two primary operations, including homebuilding and financial services.
The Company’s segments include the West, including segments located in Arizona, California, Nevada, and Washington; Mountain, including segments located in Colorado and Utah.
The east includes segments located in Virginia, Florida, and Maryland, including Pennsylvania and New Jersey, mortgage operations.
Also included are Home American Mortgage Corporation, and Other, including Allegiant Insurance Company, Inc., Star American Insurance Ltd., American Home Insurance Agency, Inc.”
Overall, M.D.C. Holdings is a great business with a good CAGR of 10% projected growth as the United States economy grows going forward with the low interest rates. The great earnings, revenue growth, and increasing orders give MDC the capability to continue its growth and have enough cash to increase the dividend and expand the business. The Fed lowering interest rates and the increase in orders for new homes make this company a strong buy.
The 2nd quarters earnings call indicates steady growth for the company’s house-building business. Homebuilding operations experienced a sharp rebound in the second quarter from the COVID-19 low. The combination of low interest rates, constrained existing home supply, and a heightened interest in single-family homeownership has resulted in a favorable environment for the housing industry. This momentum continued into June, with net orders eclipsing last year’s June totals by 53%. A significant driver of the sales increase is the company’s build-to-order model. Even with a heightened sense of urgency to own a home, many homebuyers continue to prefer the flexibility of personalization that comes in a home built with their preferred finishes and selections. The build-to-order operating model also limits the need to use price discounts or heavy incentives. The gross homebuilding margin in the quarter increased to 20%, reflecting this pricing discipline.
The graphic below shows a home in the $500,000 range suitable for a starting family.
Source: MDC web site
This shows top management’s feelings for the continued growth of M.D.C. Holdings’ business with an increase in future growth. M.D.C. Holdings have constant good growth and will continue as the United States housing needs grow. Management of M.D.C. Holdings knows how to change the mix of pricing for their homes as the market requirements change.
M.D.C. Holdings is a good investment choice for the dividend income investor with an above-average dividend and a great investment for the total return investor with projected growth of 10%. M.D.C. Holdings will be my next buy for The Good Business Portfolio because of the growing housing market and the company’s present fair valuation. The entry price right now is at the target, and my present gain potential of 20% or better makes MDC a good investment for the total return investor, with a good income also putting the icing on the cake.
The total return for the Good Business Portfolio is ahead of the Dow average from 1/1/2020 to October 9 by 0.49%, which is a small gain above the market gain of 0.18% for the portfolio with Boeing (BA) a strong drag. Each quarter after the earnings season is over, I write an article giving a complete portfolio list and performance; the latest article is titled “The Good Business Portfolio: 2020 2 nd Quarter Earnings and Performance Review”. Become a real-time follower, and you will get each quarter’s performance and portfolio companies after this earnings season is over.
Disclosure: I am/we are long BA, JNJ, HD, DLR, EOS, SLP, DHR, LMT, IR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.