Barratt Developments still wanted despite dividend cut

These are hard times for housebuilders, so a reduced payout is hardly a surprise, but Barratt still offers an attractive dividend yield and is a favourite in the City.

Housebuilders are on shaky ground at the moment, and this update from Barratt Developments (LSE:BDEV) is understandably cautious.

There is much to contend with. The half-year reporting period saw the fallout from the parlous mini-budget, interest rates continued their inexorable rise taking mortgage rates with them, and general affordability pressures resulted in a slump in potential house buyers. At the same time, there was also evidence of a cooling in house prices which could affect profitability, while in the background build cost inflation continues to eat into margins.

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The results themselves are robust enough, but concerningly much of this was made possible by the previous strength of the forward order book leading into the new financial year. As such, revenues increased by 23.9% and adjusted pre-tax profit by 15.9%, with completions also rising 6.9%.

However, other metrics point to the strain which the sector as a whole is beginning to face. Adjusted gross and operating margins fell by 1.7% and 1.6% respectively, while there was a noticeable decline in reservation rates, particularly during the second quarter of the period. Although house prices generally were estimated to have risen by 8.8%, build cost inflation remained high at around 10%, thus wiping out the gains. Net cash also declined by 14.4% from £1.1 billion to £969 million, although much of this was driven by shareholder returns and, in any event, the figure still leaves Barratts with some considerable room to manoeuvre should the outlook continue to decline.

Much as increased dividends are usually a sign of management confidence, so a reduction to the payment is also a sign of caution. The interim dividend has been reduced from 11.2p to 10.2p, a decrease of 8.9%. Even so, this leaves a projected yield of 7.8%, which remain punchy by any yardstick and which also remains adequately covered.

The trading picture since the end of the reporting period is one which is too early to call. While there were some signs of early improvement in January compared to the period leading up to December, the fact remains that net private reservations fell 45.6%, and forward sales decreased by 31% in number and by 35% in value.  

This puts real focus on the upcoming Spring selling season, which will be key in revitalising the fortunes of the sector. If there are currently signs of cooling inflation and peaking interest rates, this could result in a new influx of potential buyers. By the same token, the general economic backdrop is likely to weigh on consumer sentiment, although from a broad perspective the general shortage of UK housing supply at least provides a foundation on which to build.

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In the meantime, the share price has been unsurprisingly volatile. The more recent possibility of improving prospects has lifted the price by 19% over the last three months, although this has been insufficient to rescue the performance over the last year, where a decline of 26% compares with a gain of 3.9% for the wider FTSE100.

Uncertain though the immediate outlook may be, Barratts remains well-managed and well-regarded by investors, and the market consensus of the shares as a 'strong buy' makes it one of the preferred plays within a sector which is currently difficult to navigate.