Barratt Developments in good shape as dividend boost begins

Housebuilders have struggled in 2022 and Barratt shares hit a 14-month low, but there's lots to like in these half-year results. Our head of markets explains.

The housing market is showing little signs of cooling and the likes of Barratt Developments (LSE:BDEV) are seeing the benefit of previous careful land management.

Demand has been stronger than perhaps even the company was anticipating, and came despite the watering down of the Help to Buy scheme and the end of the stamp duty holiday. Even so, from a government perspective the drive towards more home ownership remains intact, which helps provide a generally forgiving environment for the housebuilders.

Some concerns remain, such as cost inflation and ongoing supply chain issues, while from a broader consumer perspective the elevated levels of inflation and the varying demands on the consumer wallet in the coming months could well impact sentiment as well as activity. In addition, the cost of repair to some legacy properties is ongoing, although the costs are containable and slowly reducing.

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There is also the muddying effect on the numbers of the pandemic lockdowns and how these impacted on consumer behaviour. In this reporting period, Barratts saw a decline of 9.9% to its revenues in the six months to 31 December, with home completions also falling by 11%, in part due to the strong Covid-related comparisons. Even so, the company has slightly increased its anticipated number of completions for the year to around 18,000 and, despite the reported dip, the company is well on track to deliver.

In the meantime, current trading is building on the strength of this reporting period, with a growth in forward sales of 10% by volume and 20% by value adding to the increase of 16.9% in net private reservations given the ongoing strength of demand.

As such, many of the key metrics are looking in good shape. Pre-tax profit has edged ahead of the previously strong comparative, the Return on Capital figure has spiked by over 9% and gross margin has also risen by 1.2%, with cost inflation control being a key contributor alongside a rebound in construction activity. In terms of the company’s medium term targets with regard to completions, margin and return on capital, all are currently being comfortably exceeded.

Meanwhile (and not accounting for the recent £230 million purchase of land promoter Gladman Developments) net cash rose slightly to stand at £1.1. billion, an increase of 2.3%. The announcement of a dividend of 11.2p is a significant increase from the previous year’s 7.5p and implies a yield of around 5.3%, with the promise of capital returns long established as part of the investment case for potential shareholders. Indeed, a phased reduction of ordinary dividend cover has begun, with cover reducing to 2.25x in the full-year 2022, 2.0x in 2023 and 1.75x in 2024.

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For all the progress, however, the sector as a whole has been under pressure from more bearish investors, and for Barratts the decline in the share price over the last year of 10% compares to a gain of 16% for the wider FTSE100.

Over the last two years the shares have now dropped by 22%, although the full and feared fallout from the pandemic has yet to materialise. As such, despite a faltering share price performance the general view for prospects remains firmly intact, with the market consensus for Barratts still standing at a "strong buy".