Confidence crisis as Barratt Developments dividend yield nears 9%

Not far off their 2020 low, Barratt is unable to convince investors that its shares are worth more. Our head of markets looks at annual results from the City's favourite housebuilder.

However strong Barratt Developments' (LSE:BDEV) financial foundations might be, the sector is suffering from some subsidence on a multitude of concerns.

Rising interest rates could impact consumer confidence, and there are also some signs of a cooling market in terms of house prices. The withdrawal of the Help to Buy scheme in its current form could also hamper demand, even though mortgage availability remains high.

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Higher household energy costs, which could receive some relief from the new prime minister, are also a bugbear at present, as is the wider inflationary environment.

More specifically to the sector, building material supplies are seeing something of a bottleneck, and the historic cost of remediation on older buildings is an ongoing theme – Barratt has made an additional provision for such works of £396 million this year, which has dragged on annual profit. The previous removal of the Stamp Duty holiday may also have impacted broader demand, and for the sector the possibility of higher taxation also looms large.

However, set against this raft of challenges, Barratt continues to plough on regardless, and continues to make hay while the sun shines, even if the share price performance tells an entirely different story.

Revenue for the year ended 30 June 2022 increased by 9.5% and adjusted pre-tax profit by 14.7%, in line with expectations. Completions rose by 3.9% to exceed pre-pandemic levels, adjusted gross margin grew by 1.6% to 24.8%, while the Return on Capital Employed increased to 30%.

In terms of outlook, the company is already 55% forward sold for its 2023 financial year, with total forward sales valued at £3.8 billion. The excess cash generation has also been to the benefit of shareholder returns. Aside from a share buyback programme of £200 million, the group has increased the dividend, leaving the shares on a projected yield of 8.7%, which is attractive indeed given the currently tepid savings rate environment.

More broadly, the company is reporting strong customer demand, improved productivity and, crucially, house price inflation which is greater than build cost inflation, enabling the payback on its previous land bank investments to meet the stretching profit hurdles which the company has set.

Net cash of £1.1 billion provides both stability and flexibility for further selective acquisitions should the company decide, while a steady stream of new land opportunities is under constant consideration.

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However, the overarching concerns which have blighted the sector show no signs of abating for the moment. Over the last year Barratt shares have declined by 41%, as compared to a gain of 2% for the wider FTSE100, and have halved since just prior to the pandemic.

Despite this period of underperformance, the group retains its supporters who perhaps recognise not only the strong foundations on which the company is built, but also the longer-term prospects given its ability to convert land efficiently and profitably.

Indeed, the market consensus of the shares remains at a strong buy, leaving Barratt as the preferred play in the sector despite the current sectoral travails.