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Barratt Developments - Capital returns plan extended

George Salmon | 22 February 2017 | A A A
Barratt Developments - Capital returns plan extended

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Barratt Developments plc Ordinary 10p

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In half year results, Barratt Developments has proposed to extend its capital returns plan, to include a further £175m special dividend to shareholders in 2018. With current trading also strong, the shares rose 3.2% on the news.

Our View

Shares across the sector fell sharply after the Brexit vote, amid worries that the benign conditions the sector has been enjoying could be reversed. They have since recovered as, again and again, the builders reported minimal impact on demand, although the London market does seem to be slowing.

After initially saying that contingency plans were being readied in the event of a Brexit induced downturn, the tone of Barratt's reporting has since been increasingly optimistic. At half year results in February, the group decided to extend the capital returns plan and offer a more generous ordinary dividend. The group clearly doesn't see much danger in the near term.

Lingering uncertainty about Brexit aside, the industry is enjoying goldilocks conditions. Low interest rates look like they are here to stay, and are helping mortgage affordability remain high, while the UK's ongoing housing shortage will continue to stoke the fires of demand. Many of the supportive government schemes such as Help to Buy focus on new builds, proving an added bonus to the sector.

The new dividend policy, to reduce dividend cover from 3 times earnings to 2.5 times, has boosted the prospective yield to over 7%. That could provide an attraction - although investors should bear in mind house building is a notoriously cyclical industry and things can change quickly.

Half year results:

While revenue dipped as a result of lower completions, half year profits before tax increased by 8.8% to £321m, assisted by higher margins and a 3.8% increase in average selling prices. The average home sold for £263,800 in the period.

The lower level of completions reflects the fact that, as planned, fewer homes were built in London. The group expects a significant increase in completions in London in the second half. Outside the capital, completions reached a 9 year high at 6,813. Reservation rates are slightly ahead of last year.

Return on capital employed improved 1.5 percentage points to 27%, while gross margins rose from 18.6% to 20.7%. This means the group is exceeding its targets on both measures.

Reflecting a confident outlook, the group has decided to return a higher proportion of earnings as a dividend. The interim dividend is therefore up 22% to 7.3p per share. It is also extending its capital return plan, with a further special dividend of £175m set to be paid in November 2018 in addition to the £175m due in November 2017.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.