Avoid This Homebuilder And Its 1.22% Dividend As Housing Prices Skyrocket
Over the last couple months, I’ve shown you stocks to avoid…
Stocks to consider buying…
And some of the best stocks related to the coming Internet of Things… Which you can find linked further below.
All these recommendations are to help you either avoid pain and terrible stocks. Or to help you find potentially great stocks to invest in during this pandemic.
If you do both well, it helps you earn higher than average investment returns and build wealth.
Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.
To help you figure out how to protect your retirement portfolio in these uncertain times, today I want to tell you why to– Avoid This Homebuilder And Its 1.22% Dividend As Housing Prices Skyrocket
KB Home (KBH) is a major homebuilder in the United States.
Today, I want to help you figure out whether it’s a buy or not as home prices have skyrocketed 11.2% in the last year.
It’s based in Los Angeles California. It has a $4.83 billion market cap. And it pays you a 1.22% dividend. Which is reason #1 to consider buying its stock.
KB Home’s 1.22% Dividend
In the last decade, KB’s paid out a total of $1.64 per share in dividends.
At today’s share count of 94 million shares that’s equal to $$154.16 million paid out to shareholders in that time.
These dividend payments help you earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
These regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns decent profits. Which is reason #2 to consider buying KB Homes stock.
KB Homes Earns Decent Profits
Over the last decade it earned an average operating income margin of 4.2% per year.
I look for anything above 10% so this is well below what I look for.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its negative 3.4% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.
KB Homes falls short of both these important metrics.
Let’s move onto its debt.
KB Homes Has Low Debt Levels
As of this writing KBH has $570 million in cash compared to $1.78 billion in debt.
As a percentage of its balance sheet total liabilities make up 49.4%.
Debt makes up 36.9% of its market cap.
And its debt-to-equity ratio is 0.65.
These all below the minimum thresholds I look for… As one example, I look for debt to equity ratios to be below 1.
Meaning, KB Homes has low debt levels.
This gives it a large margin of safety which makes up – partially – for its low profitability margins.
This gets us to our last thing to look at… Valuation. Is it cheap enough to buy?
KB Homes IS NOT Cheap…
With the markets at or near all-time highs you’d expect a decent stock like KB Homes to be selling at an enormous valuation.
It’s not… But it’s still not cheap enough to buy.
As of this writing its P/E is 13.9.
Its P/CF is 19.2.
Its forward P/E is 9.4.
And its enterprise value to operating income – EV/EBIT is 15.9.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These metrics combined show that KB Homes is slightly overvalued right now.
And this means owning its stock does not give you a large margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With KB Homes being overvalued right now, its stock does not offer you a large margin of safety… Especially when you consider its below average profits and its above average debt levels.
Plus, there’s another area of concern for KB Homes stock for now.
One Area Of Concern…
If you’re now thinking about buying KB Homes stock for your retirement portfolio, I have another word of warning.
Home prices are skyrocketing right now due to near historically low mortgage rates… And because there’s little to almost zero supply of homes for sale out there right now this is leading to a massive increase in home prices and new home building.
In the last year alone, home prices on average have gone up nationwide 11.2%… In just one year. That’s nuts.
Because of this KB Homes is doing well… But still not great. When the housing market falters, its stock will fall.
Probably not to the large degree it did during The Financial Crisis… But it still will fall.
Because of this you need to be comfortable with this risk before buying KB Home stock… But it’s not cheap enough or good enough to do so anyways.
If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – avoid KB Homes and consider investing in one of the great stocks below.
And consider one of the other investments below.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.