Barratt Developments optimistic but dividend plan disappoints

Income seekers must wait for payouts from this housebuilder. Here’s what our head of markets thinks.

Barratt Developments (LSE:BDEV) had been performing strongly prior to the pandemic, and there are some signs that a recovery is already in place following the full opening of its sites at the end of June.

Net private reservations from July to the end of August were ahead by 38% year-on-year, with forward sales 20% up and completions improving by over 60% as at the end of August. While some of this will inevitably be the result of pent-up demand, it also suggests not only something of a return to business as usual, but also a housing market which has remained more resilient than many had anticipated.

But in these annual results to 30 June, its optimism does not yet extend to the dividend. The previously announced cancellation of the ordinary and special dividends will, in the case of the latter, extend also to next year with the company taking a decision to reintroduce payments when the “time is right” and subject to a cover of 2.5 times. Prudent though the decision may be, this conservative approach will come with a tinge of disappointment to investors who are currently income-starved to a large extent.

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The environment which derailed the company’s progress could yet return, however, hence the cautious approach. A second shutdown, less buying activity given the current recessionary environment and likely spike in unemployment, and the resumption of the UK/EU Brexit negotiations, are all potential spanners in the works. 

At the same time, the Help to Buy scheme will continue only in a watered-down form from next year, and the availability of high loan to value mortgages has been crimped post-pandemic amid more cautious lending decisions.

The effect which the pandemic had in largely wiping out the final quarter of Barratts’ year is plain to see in the full-year numbers. Revenue was down by 28%, gross margin fell by 4.8% and pre-tax profit tumbled 46% overall. Covid-related costs incurred of over £74 million reflected items such as safety and non-productive site costs and writedowns necessary due to longer site durations as work stood still.

Even so, the housebuilders are in far better shape generally than was the case following the previous financial crisis. For its part, Barratts firmly closed the door on land buying and recruitment activity, non-essential capital expenditure and of course dividend payments. As such, it retained £308 million net cash for the period, with an undrawn credit facility of £700 million in the background, providing a strong financial backdrop. The decision to repay the monies received from the government by way of furlough payments was another indication of the leeway which the robust model provides.

From a wider perspective, many of the tailwinds for the sector remain in place, with the current stamp duty holiday adding to the list of historically low interest rates, generally good mortgage availability and an ongoing housing shortage. The immediate question is whether the current return to form can be maintained in an environment where many of the potential negative factors are outside of the company’s control.

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The shares have had a strong recovery of late given this backdrop, having risen by 38% since the March nadir. Unfortunately, this does not mask the damage inflicted by the pandemic in total. A share price decline of 20% over the last year is also in line with the drop for the wider FTSE 100 index during the period and also proof positive of the stain which Covid-19 left. 

By the same token, Barratts is now looking to make up for lost time wherever possible and there are already some hopeful signs. In the meantime, the company is held in high regard by investors and the current market consensus of the shares as a ‘strong buy’ will likely hold firm.

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