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Barratt Developments - standing firm amidst uncertainty

George Salmon | 6 February 2019 | A A A
Barratt Developments - standing firm amidst uncertainty

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Barratt Developments plc Ordinary 10p

Sell: 619.40 | Buy: 619.80 | Change 1.20 (0.19%)
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Barratt has enjoyed another half of margin, revenue and profit increases.

The group announced an interim dividend of 9.6p per share, up 11.6% on last year.

It also declared a further £175m (c.17.31p per share) will be returned to shareholders in November 2020. Current economic uncertainty means this will be a combination of special dividends and buybacks.

The shares rose 1.6% in early trading.

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Our view

Conditions have been favourable for housebuilders these last few years. Interest rates are still low by historical standards, which supports mortgage affordability. All the while, the UK's ongoing housing shortage continues to stoke the fires of demand for new builds. The icing on the cake is supportive government schemes like Help to Buy.

However, there are indications sands are shifting. House buyer sentiment is already wavering, with prices growing at the slowest rate in years, and the government's announced Help to Buy will end in 2023. Add in the uncertainty around Brexit, and worries are gathering that conditions could change at short notice.

That's caused the share price to falter in recent months, and prices could move as sentiment around Brexit changes. The possibility of continued volatility is behind Barratt's plan to distribute future shareholder returns through a combination of buybacks and special dividends.

Saying shareholders would be better served through buybacks than special dividends should the price fall further is a reassuring message for investors. That's because it implies the company would remain confident in its prospects, despite what the market may think. Of course, there's no guarantee the group has read the situation correctly though.

Its confidence would no doubt come from the fact its operational performance has been good, with strong client satisfaction and increasing margins.

It's on solid financial foundations too. In marked contrast to the last housing crisis, the balance sheet is net cash before accounting for land creditors, which are falling. All that means Barratt's is far better prepared for any downturn than it has been in the past.

Given that extra resilience, the shareholder returns on offer are clearly attractive for now, but investors should bear in mind that a large chunk of that is deemed a special pay-out. That would be at risk of being cancelled if we get a crash.

Looking only at the ordinary dividend, the prospective yield is 4.9%.

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First half trading details

Total completions for the six months to 31 December 2018 were 7,622, a 4.1% increase on last year. Average selling prices were broadly flat at £282,000, as higher London prices offset a decline in other areas, with selling prices impacted by a slightly less favourable mix. As a result, revenue increased 7.2%, to £2.1bn.

Barratt expects average sale prices to be lower in the second half of the year, as it reduces its activity in London. But the group is confident full year performance will be in line with previous expectations.

Operating profit increased 15.3% to £409.7m, as operating margins increased to 19.2% from 17.9%. That was driven by land being bought at a higher gross margin, and the use of more efficient build-types.

The group now has 3.7 years' worth of land with relevant planning permission.

The net rate of private reservations per week fell 5%, to 0.74 per outlet.

As at 31 December 2018, net cash stood at £387.7m, compared to £165.9m in 2017. That reflects cash generated from completions and the timing of its land investments.

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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 disclosure for more information.