Hovnanian Enterprises Most well-liked Inventory Variety Comes With Dangers (NYSE:HOV)

Introduction

Just lately, I’ve lined quite a few banks and the popular shares they’ve issued. Monetary establishments are the foremost supply of most popular shares since they will, for essentially the most half, depend them as a part of the Tier 1 capital necessities. That stated, discovering a problem that enables buyers to diversify away from financial institution points is at all times value exploring. Towards that objective, this text will assessment Hovnanian Enterprises (NYSE:HOV) and the one most popular inventory it has issued, the Hovnanian Enterprises, Inc. PFD DEP1/1000A (HOVNP).

Hovnanian Enterprises assessment

Searching for Alpha describes this homebuilder as:

Hovnanian Enterprises, Inc., via its subsidiaries, designs, constructs, markets, and sells residential houses in america. It gives single-family indifferent houses, connected townhomes and condominiums, city infill, and energetic life-style houses with facilities, reminiscent of clubhouses, swimming swimming pools, tennis courts, tot tons, and open areas. The corporate markets and builds houses for first-time patrons, first-time and second-time move-up patrons, luxurious patrons, energetic life-style patrons, and empty nesters. It additionally supplies mortgage loans, title insurance coverage, and house owner’s insurance coverage providers. The corporate was based in 1959 and is headquartered in Matawan, New Jersey.

Supply: Seeking Alpha

The next map exhibits the place Hovnanian Enterprises builds houses.

Hovnanian ranks among the many largest homebuilding firms within the U.S., with whole revenues of $2.76 billion on 5,473 house deliveries in fiscal 2023. Homebuilding revenues by space had been: Northeast: 34%; Southeast: 17%; Southwest: 49%. Particulars per area had been additionally supplied.

I used to be a bit of stunned that the common house value within the Southeast was near the Northeast. The web site exhibits city-level information which might be important in understanding the common promoting costs per area.

Managed tons assist point out the place future revenues may come from, as does the common house value in every of the three areas. The pie chart on the precise exhibits which class of patrons are drawn to Hovnanian houses, with first time patrons being tied with upgraders.

With house gross sales various extensively by quarter, I selected to make use of annual information for the subsequent half.

Even on the annual degree, working earnings has not been regular. Issues had been going so poorly that in 2019, HOV did a 1-25 reverse break up. The value chart above exhibits the loss these pre-2019 buyers took in the event that they held on.

So, how protected are the popular stockholders? For that, we have to take a look at the steadiness sheet. Whereas higher (it was detrimental previous to 2021), at 3.5X, the protection is the smallest I’ve seen.

HOVNP assessment

I picked the 10-year chart because it clearly exhibits the dearth of most popular dividends paid for years.

Notice the score which confirms my low protection concern; you can not get a a lot decrease score! The actual fact this challenge was non-cumulative means buyers misplaced out on all anticipated dividends between 2008 and the top of 2021, fourteen years!

Since widespread stockholders obtain no dividends at present, no payouts to these buyers doesn’t present any safety to HOVNP holders.

Portfolio technique

A ten.7% yield, plus diversifying one’s most popular inventory allocation away from a monetary establishment dominated one, may be very tempting. One purpose to diversify is not supplied by HOVNP, that being including a cumulative most popular to your portfolio. That proved painful for holders/patrons of this most popular for over a decade.

All my current most popular inventory critiques have been throughout the banking business, each money-center and bigger regional ones. Yields on these at present vary from 5.5%, as much as 10.2% for the Citigroup Belief most popular inventory (article link). Being there may be “no free lunch”, this challenge has a floating coupon, is callable, and sells for over $29. Regardless of its 12+% coupon, Citigroup hasn’t known as, however that may be a threat buyers want to think about in comparison with whether or not Hovnanian Enterprise will keep worthwhile sufficient to maintain paying the dividends owed to holders of HOVNP. For that evaluation, I level readers to this Searching for Alpha article: Hovnanian’s Valuation, Ownership, And Debt Concerns: Is It A Viable Investment?

The US housing market is dominated by native builders, and a number of other main gamers like Hovnanian. Excessive mortgage charges have slowed each new house development and people trying to improve, the second-largest supply of patrons for HOV. Years of low ranges of latest models approaching market and low-rate mortgages holders not desirous to promote, additionally add distinctive inputs builders have to confront. All these add uncertainty to this challenge being viable long-term. That stated, for buyers understanding the dangers, in all probability higher than I, HOVNP will get a Purchase score. For the remainder of us, look elsewhere for such a wealthy yield.

Remaining ideas

Together with the no cost threat HOVNP’s non-cumulative function presents, as an investor, I don’t look fondly on firms the place one class of inventory, class B on this case, is managed by a restricted variety of insiders and will get 10 votes per share versus just one for HOV class A holders.