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Barratt Developments - another strong year

George Salmon | 6 September 2017 | A A A
Barratt Developments - another strong year

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Barratt Developments plc Ordinary 10p

Sell: 715.40 | Buy: 715.80 | Change -3.40 (-0.47%)
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July's trading statement had already confirmed the year to 30 June 2017 was another strong one for Barratt Developments. There was therefore little to surprise investors in the full year results, although the group did confirm the final dividend increased 39% to 17.1p per share. This, together with a special dividend of 17.3p per share, is set to be paid in November.

In a weak market on the morning of results, the shares fell 2.7%.

Our View

Barratt took its foot off the pedal in the immediate aftermath of the EU referendum, slashing spending on new land and readying contingency plans in the event of a crash. It need not have worried. The UK's biggest housebuilder is once again exuding an air of confidence.

Although house price growth has started to slow, and question marks remain over the London market, demand has generally remained strong. By February's half year results, Barratt felt comfortable enough to extend its capital returns plan and offer a more generous ordinary dividend.

There are plenty of factors supporting this decision. While interest rates may creep up, they look set to stay low by historic standards. That should support mortgage affordability, while the UK's ongoing housing shortage continues to stoke the fires of demand for new builds. Supportive government schemes, such as Help to Buy and the Lifetime ISA, remain in place, with a focus on new builds providing an added boost to the builders.

Operationally, performance has been good, and the balance sheet looks in reasonable shape as well. Gross margins have grown from 12.8% in 2012 to 20% this year, and the group is taking measures to improve efficiency in the construction process. This is encouraging to see, but investors should note that land prices and other input costs have been rising recently.

The prospective yield is 6.5%. That level of income is clearly attractive - although investors should bear in mind that these are goldilocks conditions, and housebuilding is a notoriously cyclical industry where things can change quickly.

Full year results

Barratt Developments completed on 17,395 properties in 2016/17, the highest level in nine years. The average selling price for the period rose 6% to £275,000 thanks to a combination of sales mix and underlying house price inflation.

More sales at higher prices have pushed profit before tax up to £765m (2016: £682.3m), in line with the guidance provided in the group's July trading statement. Return on capital employed of 29.8% is comfortably ahead of the 25% goal, although this has been boosted by the group's policy of deferring payment for new land where possible. At present, payment of 37% of the group's £2.9bn land bank is due to land creditors.

In the first nine weeks of the year, the rate of private reservations per active site per week has remained steady at 0.74. The group has secured sales of 12,160 plots, meaning forward sales are £2.75bn, up 13.8% on last year. However, at £51,750, the average price of the 18,497 plots of land Barratt bought in 2017 was 15% higher than the previous year. Barratt expects to purchase over 20,000 plots next year.

The group remains committed to the enhanced dividend policy it announced back in February, paying out 40% of earnings as a dividend as well as a proposed special dividend of £175m in November 2017 and 2018.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 for more information.