Barratt Developments: A cheap income play too good to miss?

There's lots to like about housebuilders, but all may not be what it seems, writes our head of markets.

Until recently, the housebuilders had been directly in the firing line given Brexit uncertainty. This position has changed of late as the sector generally continues to make hay while the sun shines.

The backdrop has been supportive for some considerable time, as historically low interest rates, initiatives such as Help to Buy, and a general housing shortage have played into the hands of the likes of Barratt Developments (LSE:BDEV). 

The company has been capitalising on this environment, while also mindful of not repeating the mistakes it may have made leading up to and including the financial crisis. The company now has net cash of around £765 million, which is strong insurance against any downturn, and in the meantime this strong cash generation has enabled it to pay special dividends by way of reward to shareholders, in addition to the basic yield of 4.8%. 

Operating margin is expected to have improved to 18.9% from 17.7%, forward sales are nearly 20% ahead of the previous period, and the statement comes with a profits upgrade. Barratts is guiding for pre-tax profit of £910 million, ahead of market expectations and a 9% improvement on 2018.

This is not to say that the Brexit shadow has been lifted, although, interestingly, the company has pointed out that 90% of its housebuilding materials are either manufactured or assembled in the UK. 

Source: TradingView Past performance is not a guide to future performance

Even so, depending of the nature of Brexit, there will be implications for the UK economy which, in any event, are likely to result in some short-term pain. Further out, the Help to Buy scheme will be removed in 2023, while interest rates will always be a cyclical concern. Nonetheless, those are not stories for today.

• Time to sell this FTSE 100 housebuilder?
• Is this share a pre-Brexit buy?

The performance of the shares has been rather more pleasing of late, reflecting at last an appreciation of how tightly the company is being run. 

Despite a 5% drop over the last quarter, the shares have added 19% over the last year, which compares to a 2% decline for the wider FTSE 100 during that period. 

This has come at a cost to the market consensus, however, which has reduced to a 'strong hold', reflecting that, while Barratts is delivering on most if not all metrics, there are elements outside of its control which could yet cause some damage.