There’s someone who seems to think the Barratt Developments (LSE: BDEV) share price makes it a buy. It’s Barratt, snapping up its own shares since September as part of a £200m buyback programme. The second tranche commenced in October.
After a 45% fall over the past 12 months, I can see the attraction.
The risks I see come from recession, rising interest rates, expensive mortgages and house price stagnation. That’s all going to put pressure on profits and dividends.
Balance sheet
Still, for the year ended June, Barratt recorded rises in completions, revenue and profit. The balance sheet carried net cash of £1,139m, down a little from the same point in 2021. But the company had spent £205m in cash acquiring land promoter Gladman Developments during the year.
Interest rates have really only started biting since then though. But the results were released in September, at the same time Barratt announced its share buyback programme.
At that point, our economic situation and interest rate progression were abundantly clear. And I’m pretty sure its board could see the longer-term horizon. At the time, the company reported a “strong forward sales position” for 2022-23, although I expect pressure on that to grow over the course of the year.
Homes shortgage
I saw one key phrase in the interim report that I think sums up the whole housebuilding sector. It spoke of “the continued imbalance between housing supply and demand”. That’s been going on for decades, and a couple of years of recession isn’t going to end it.
I remain convinced the industry has long-term growth ahead of it. The big question in my mind is how much lower shares might go before we see signs of price recovery. That’s where I really have no idea. And it’s also why I invest for the long term and try to ignore what happens in the short term.
Interest rates
I hope high interest rates won’t last for too long, and that we’re only looking at a one-off inflation shock caused by the world events of 2022. I see little likelihood of a period of overheated demand that would need a long spell of high interest rates to cool.
But as long as we’re in a recessionary environment and mortgages are relatively expensive, I can see bearish sentiment keeping the Barratt share price down.
Valuation
The bottom line for me comes down to valuation. Even with a forecast earnings fall, analysts expect a price-to-earnings (P/E) multiple of only a little over nine at its highest over the next few years. That looks too cheap to me.
I see a dividend cut before the recession ends as probably more likely than not. But in 2021-22, Barratt paid out £337m in dividends and ended with more than £1bn cash left over. I think that says good things for long-term income investors.
No-brainer?
So do I think it’s a no-brainer buy now? With the short-term risks, I wouldn’t go that far. But if I didn’t already have sufficient exposure to the housebuilding sector, Barratt shares would be on my buy list. In fact, they might make it anyway.
