It’s probably fair to say that UK housebuilders won’t look back on recent times with affection. Indeed, the latest set of full-year numbers from FTSE 100 member Barratt Developments (LSE: BDEV) go some way to confirming the housing market is truly in a tough spot.
Falling profits
Revenue and adjusted pre-tax profit came in at £5.3bn and just over £884m respectively for the 12 months to 30 June.
That may not sound too bad. In fact, these numbers were close to what analysts were expecting. However, the latter is 16% lower than the year before. Realistically, things could get worse before they get better.
The near-term outlook for Barratt is understandably tricky. The cost-of-living crisis rumbles on and many would-be buyers now struggle to afford mortgages. This is only likely to get worse if, as is widely expected, the Bank of England continues hiking interest rates.
Ominously, forward sales came to £2.44bn towards the end of August. That’s a fall of 36% from the previous year.
Inflection point?
Based on the above, investors might believe that Barratt’s shares should be avoided. I think the opposite.
While falling as markets opened, it’s interesting to note that the share price didn’t exactly tumble. In fact, Barratts shares are still up 4% or so in 2023 to date.
This suggests to me that an awful lot of negative news is already priced in and that we may — with the emphasis on “may” — be close to an inflection point.
But there are other things that grab my attention here.
Huge dividend
Like many of its peers, the company’s finances look robust. Net cash still came in at over £1bn at the end of June. That’s the sort of cushion many housebuilders didn’t have back in 2007.
As the company itself states, there also remains a “continued and deteriorating imbalance between housing supply and demand“. That’s an enduring tailwind if I ever saw one.
Another positive — perhaps the biggest of them all currently — is the dividend stream.
Barratt confirmed a total payout for FY23 of 33.7p. That’s down on the 36.9p awarded in FY22. However, it still translates to a very chunky trailing yield of 7.7% using the share price at the time of writing. By comparison, a fund that tracks the FTSE 100 index would generate 3.8%.
Of course, it doesn’t really matter how good a company’s income looks if it isn’t likely to be paid out. However, Barratt’s management has said it would aim to cover dividends 1.75 times by profit in FY24. That’s reassuring (assuming this target can be hit), even though cash returns are unlikely to grow for a while.
Time will tell as to whether the dividend needs to be lowered further.
Patience required
Given that I already hold shares in another UK housebuilder, I won’t be snapping up Barratt’s stock today. Considering the multiple economic headwinds, it still pays to remain diversified and own stakes in a sufficient number of businesses that aren’t exposed to the property market.
That said, I continue to regard the sector as worthy of investment so long as I’m willing to be patient. In fact, I reckon Barratt’s shares will comfortably beat the market return over the next five years.
