Barratt Developments dividend yield nears 11% after latest share slump

The shares are down again at a nine-year low after this update, but is this a warning or an attractive entry point for more steely investors? Our head of markets looks at the numbers.

Given that the country is gripped with wider economic uncertainty, inevitably some chinks in the armour have begun to appear for the housebuilders.

Barratt Developments (LSE:BDEV) has seen a sharp decline of 33% in net private reservations per week for the latest period, although on most metrics numbers remain above pre-pandemic levels. In this update for the period from 1 July to 9 October, Barratt said forward sales have also declined by 13% in number and by 8.5% in value, although the general position is one of a strong order book which is 64% forward sold even at this early part of the new trading year.

• Read about how to: Open a Trading Account | How to start Trading Stocks | Top UK shares

Average selling prices have risen by 9.6%, which is mitigating some of the effect of build cost inflation, which the company expects to continue into next year at its current rate of between 9% and 10%. At the same time, Barratt has pulled back sharply on new land acquisition, given a lack of suitable opportunities which meet the group’s high hurdles of gross margin and return on capital. Even so, its strong existing land bank is a real prop to any slowdown in immediate purchasing activity.

More broadly, the factors which have blighted the housebuilding sector from a share price perspective have recently moved to another level, with the additional concerns surrounding the government’s general spending plans and the resultant effect on the UK bond markets. This has immediately fed through to increased mortgage rates which, coupled with reduced mortgage availability, has had an instant impact on customer activity.

These factors lead to the previously held wider concerns of the impacts of a cost-of-living crisis, the expected reduction of Help to Buy activity, and some signs of a cooling housing market. In conjunction with inflationary pressures which affect the consumer as well as the business, the fact the screw is being turned on the housebuilders is becoming more evident. It is therefore of little surprise that Barratt’s outlook statement is one of less certainty, although importantly, it is predicting full-year adjusted pre-tax profit to remain in line with expectations, coupled with sales outlet growth of 3% for the new financial year.

There is little question that Barratt is in a strong position to weather this storm, given the flexibility which its substantial net cash position provides and with a strong forward sales book already in place. This has enabled the previously announced share buyback programme which is currently in play and, in terms of shareholder returns, the current dividend yield of 10.8% is a clear attraction to investors, even if some of this figure can be attributed to the falling share price, where the yield is boosted by price declines.

It is the question of those declines which will now become the focus of investor attention. On an historic basis, the likes of Barratt now look cheap in terms of valuation, with the underlying cash position remaining robust.

• The 50% Club: bombed-out cyclical stocks to own when the market turns
• ii view: Barratt’s yield may tempt income seekers

Even in the face of some cooling of demand, the UK still suffers from a general shortage of supply, and schemes aimed at assisting new buyers on the property ladder remain in play. Until now, housebuilders had shown few signs of the pain which their share price declines would suggest and even after this update the dilemma remains as to whether the full impact of the headwinds has now been priced in.

For Barratt, the negative reaction to the update in early exchanges adds to a share price decline of 46% over the last year, as compared to a drop of 3.4% for the wider FTSE100, with the housebuilding sector having largely been in the eye of the storm. Such declines could yet provide an attractive entry point for more steely investors, while the market consensus of the shares as a 'strong buy' is evidence of existing support for Barratt’s own prospects.