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Barratt Developments - dividend policy changes

Barratt Developments reported an 11.1% fall in completions to 8,067 in the first half, as demand patterns normalised following last year's lockdowns.

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Barratt Developments reported an 11.1% fall in completions to 8,067 in the first half, as demand patterns normalised following last year's lockdowns. Lower completions, build cost inflation and other costs meant underlying operating profit fell £55.3m to £449.9m.

The group now expects to complete 18,000-18,250 homes this year, 250 ahead of previous guidance, and higher than pre-pandemic levels.

An interim dividend of 11.2p was announced, 49.3% up on last year. Barratt said it would be introducing a phased reduction in ordinary dividend cover, with cover of 2.25 in 2022, reducing to 1.75 in 2024.

The shares were unmoved following the announcement.

View the latest Barratt Developments share price and how to deal

Our View

Barratt's in a good position as lockdown-fuelled demand winds down and supply chain issues loom. Despite these headwinds, trading's a smidge ahead of expectations. Forward sales are ahead of pre-pandemic levels, and prices continue to climb.

Barratt itself is well on the way to recovery too. Completions are ahead of 2019 levels, and higher prices mean revenues are already back in growth territory.

Exceptional costs are a lingering bugbear, having proven anything but exceptional recently as the group spends tens of millions every year on rectifying past mistakes. Those corrections cost the group £81.5m in 2021 and are expected to total £40m this year. We hope to see them fall from there.

Still, getting back onto a firm footing is no mean achievement given the economic headwinds the group faced last year, and others that are only just emerging. Build cost inflation is running at over 5% and while that's being offset by higher house prices at the moment it's a trend that's unlikely to continue forever. At some point the number of buyers at higher prices will dry up and the group will have to rely on increased sales rather than higher prices to drive profits higher.

We see that as the key factor driving Barratt's long-term goal of 20,000 completions a year. The group approved the purchase of 18,067 plots last year at a cost of £876.8m. The recent purchase of Gladman's is another step in the right direction, not only should it directly deliver around 500 new homes a year from 2025 on, but it'll help the group source strategic land.

The group's targeting gross margins, profits after build costs but before central and financial expenses, of 23% from the new land it buys - which if it can be sustained at the 20,000 properties a year rate would imply a significant improvement in operating profits.

Accounting for the recent acquisition, plus money the group has already committed to pay for land, net cash stands at an enviable £1bn+. That gives the group some options. Further acquisitions could be on the cards or the group could return some cash to shareholders with a share buyback or special dividend. Either way, it helps prop up the 6.6% prospective dividend yield, although no dividend is ever guaranteed. Investors should also be aware that Barratt's dividend coverage ratio is going to start tempering - if profits and cash flow stay healthy this shouldn't mean any drastic changes, but if there are any unwelcome surprises there could be a more significant change on the horizon.

Ultimately, Barratt has come out of the crisis in good health, and we think the long-term fundamentals of the UK housing market remain intact. Sharp rises in inflation and interest rates have the potential to take some heat out of the market, for those prepared to accept ups and downs, we think Barratt is a strong name in its sector.

Barratt Developments key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Half year results

Revenue fell almost 10% to £2.2bn, reflecting reduced completion volumes, which offset a £4,500 increase in average selling prices to £288,000. Private average selling prices rose 2.5% to £327,400, while there was an 8.1% rise for affordable homes to £157,100.

The average sales rate per outlet, per week was 0.79, compared to 0.77 last year and 0.69 in 2020. 22% of private reservations used Help to Buy, down from 49% last year. Barratt operated from an average of 337 outlets, down from 342 last year.

Total forward sales were up 9.1% as at the end of December to 14,818 homes, valued at £3.8bn.

Build cost inflation was around 5% in the half, and this is expected to increase to around 6% for the full year. The effect on margins is expected to be minimal.

The group approved £673.4m (2021: £254.0m, 2020: £406.1m) of operational land for purchase, equal to 8,869 plots. Barratt invested around £410m on land acquisitions and the settlement of land creditors during the half year, and expects to spend around £300m more on land this year compared to 2021.

Lower profits meant Barratt had free cash flow of £29.4m, down from £788.8m last year. Net cash was £1.1bn as at the end of December, similar to last year.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 9th February 2022