I already own Barratt Developments (LSE:BDEV) shares in my investment portfolio. It’s so far served me well as a way to make a healthy passive income.
At current prices I’m tempted to buy more shares in the FTSE 100 housebuilder. Barratt’s 25%+ share price decline over the past year means it carries dividend yields of 7.2% and 5.2% for this financial year and next.
Such figures comfortably beat the FTSE index average of 3.5%. And what’s more, at current prices of 472p per share the business trades on a rock-bottom forward price-to-earnings (P/E) ratio of 7 times.
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But how realistic do current dividend forecasts look? And should I add more of Barratt’s shares to my Stocks and Shares ISA today?
Dividend cuts
City analysts are expecting the homebuilder to cut the annual dividend twice in the next two years as the housing market weakens.
Predictions of dividend cuts look quite likely too. Industry pressures have already prompted Barratt to slash this year’s interim payout by 8.9% to 10.2p per share, it was announced yesterday.
The number crunchers expect it to pay a total dividend of 34p in the 12 months to June 2023. This is down from the 36.9p reward shelled out last year.
In financial 2024 the dividend is tipped to fall further, to 24.6p.
Patchy protection?
In better news, this year’s dividend forecast is well covered by expected earnings. Coverage sits at 2 times, coinciding with the benchmark of 2 times and above that’s sought out by investors.
However, next year’s anticipated dividend is covered just 1.5 times by projected earnings. This is well below that widely accepted safety level. It’s also under Barratt’s own cover target of 1.75 times starting from financial 2024.
Okay, the company has plenty of cash on its books. This could help it to pay those market-beating dividends if profits disappoint.
Net cash came in above £969m as of December 31. However, this was down from the £1.1bn it recorded at the same point in 2021.
Big doubts
On balance, Barratt looks in good shape to meet City dividend forecasts for this financial year that ends in the summer. But I’m far from convinced that it will be able to meet broker estimates for financial 2024.
Forward sales at the business have collapsed due to the cost-of-living crisis and rising interest rates. These dropped to 10,854 homes as of 29 January from 15,736 a year earlier.
It may take time to build the order book up too, with further Bank of England rate hikes tipped and the UK economy struggling. So profits could sink without trace in financial 2024 and its cash position weaken considerably.
Encouragingly Barratt says it had witnessed “some early signs of improvement in current trading during January.” But despite a slight improvement in reservation rates it added that the market outlook remains “uncertain”.
The verdict
The long-term outlook for Britain’s housebuilders remains robust, in my opinion. Population growth means demand for new homes will rise steadily.
This is why I plan to hold on to my current shares in the business. But I won’t be adding to my holdings in the current market climate.
I’d rather buy other UK dividend shares for market-beating passive income over the next couple of years.
