How long will Barratt Developments remain out of favour?
5th September 2018 11:28
by Richard Hunter from interactive investor
A knockout dividend yield and modest valuation have failed to reignite buying interest, and the sector is in the firing line. Richard Hunter, head of markets at interactive investor, runs through latest results.
On the face of it, it is difficult to see what more the housebuilders could do in order to fend off the bears. Today's full-year numbers from Barratt Developments will pose further searching questions to detractors of the sector.
Revenues are up 4.8%, operating margin continues to improve, the company's net cash position has risen by 9.3% (potentially providing a buffer to future economic woes which Barratts has not had in the past) and the pre-tax profit number is up over 9%, as previously guided.
The target of 25% for return on capital employed (ROCE) is already being exceeded, earnings per share have jumped 8.5%, whilst forward sales are also up by a healthy 11%.
Source: interactive investor Past performance is not a guide to future performance
The group's ability to throw off cash has resulted in a special dividend, which not only adds to an existing yield of 4.8% but also leads to a prospective yield of over 8%, which is extremely punchy by any standards, and especially to income-seeking investors.
And yet the naysayers continue to have the upper hand. With interest rates now potentially set on an upward curve and the economic outlook increasingly uncertain as Brexit negotiations falter, the sector is in the firing line.
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In addition, rising construction costs and the possibility of any government withdrawal in its current quest to reduce the housing shortage in the UK cast long shadows. Any weakness in house prices is being seized upon and despite Barratts' protestations, these factors are prevalent.
With the market consensus of the shares remaining at a 'strong buy', there is one glaringly obvious missing piece of the jigsaw, in the form of the share price.
A 13% dip over the last year compares to a slight uptick of 0.6% for the wider FTSE 100 and, until the investment clouds clear, this beleaguered sector looks set to remain out of favour with investors.
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