Barratt Redrow swaps dividends for share buybacks

Barratt Redrow (LSE:BTRW) is amending its shareholder return policy, and the more efficient use of capital announced in this update for the year ended 28 June is likely to be well-received by investors.

There had been some shareholder pressure on Barratt to deploy its capital more effectively and the company has responded. The new £400 million programme will comprise a share buyback scheme of £386 million alongside a nominal 1p per share dividend payment totalling £14 million. While the yield will therefore plummet to 0.4% from its current level of 6.2%, the buyback should prove to be price supportive and in addition reflect the group’s currently gaping discount to its net asset value per share.

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The move is another example of Barratt’s ability to move the levers under its control within an incredibly challenging environment. The group had previously announced that one of its strategic options would be to reduce land spend to protect profitability and financial strength, and a spend of £625 million compares to £862 million the previous year and is much lower than the £700-800 million recently guided. This has also at a stroke improved the group’s net cash position, which stands at £772 million, in excess of the £550-650 million it expected when reporting in April.

The use of incentives, which includes but is not limited to a successful part exchange programme, is an effort to maintain buying interest but inevitably puts pressure on margins. Alongside the reduced spend on land, cost savings continue to be a factor to mitigate some of this pressure, and this year’s £53 million exceeds the £50 million target. It has also enabled the group to achieve an adjusted pre-tax profit of around £560 million, which is in line with expectations and is a notable improvement from the previous year.

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Elsewhere, progress is measured rather than significant. Net private reservations per week have marginally improved, the group delivered on its target of home completions within a range of 17,200 to 17,800 homes, coming in at 17,667. The forward order book is also reasonably healthy at £2.82 billion, representing 9,728 homes, of which 63% are already contractually exchanged. Barratt is estimating home completions of between 17,700 and 18,200 next year, but is inevitably cautious on the wider environment, and with good reason.

Currently, it is difficult to envisage a significant rerating of the sector, which inevitably leads to there being a cap on share price appreciation. The spring and summer selling season was relatively lacklustre, with mortgage approvals down, stifled demand from stamp duty changes and the uncertainty surrounding the housing policy of the new Prime Minister.

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The latest thorn in the sector’s side was an announcement at the end of June that a class action seeking £4.5 billion compensation from seven housebuilders including Barratt was being launched, over claims that anti-competitive behaviour among those firms had led to higher prices for new builds had been charged between October 2015 up to June this year. In addition, higher global energy prices and potential supply chain disruption resulting from the conflict in the Middle East has led Barratt to estimate build cost inflation next year of between 3% and 4%, let alone the impact the war could have on general consumer propensity to buy given the likelihood of higher for longer interest rates.

More positively, and seen through the prism of the long term, there are any number of positive building blocks which should serve the sector, and in turn Barratt, well. There remains a supply imbalance for homes in the UK which will ensure ongoing demand, the government is looking to ease planning regulations and at some point the estimated trajectory for interest rates will be revised downwards, which should also encourage new buyers. In the meantime, Barratt remains a well-run and well-regarded company.

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Unfortunately this has not been enough to arrest a share price slide which has seen a fall of 33% over the last year, significantly missing out on the 17.8% rally of the wider FTSE100, despite a bounce of 8% over the last three months. The two- and five-year performance is even more galling with declines of 44% and 59% respectively, showing the level of recovery required.

By the same token this leaves an undemanding valuation and it seems that investors retain a conviction to look through the more immediate challenges and concentrate on the possibilities of a recovery for the economic cycle, reflecting the group’s prospects as a longer-term play. As such, the market consensus of the shares as a strong buy and a warm opening reaction to the numbers are proof that investors are standing by the group despite its challenges.

Annual results are due on 16 September.