ii view: Barratt cuts director pay and furloughs staff

After a 40% share price drop in 2020, the housebuilder is taking measures to conserve cash. 

Covid-19 trading update

• Furloughing around 85% of employees
• Directors taking a 20% pay cut
• Cash held of £450 million
• Interim dividend payment of 9.8p per share cancelled

ii round-up:

Adding to a late March announcement, UK housebuilder Barratt Developments (LSE:BDEV) today announced further Covid-19 measures.

Directors and non-executives have agreed to a 20% reduction in salaries and fees until a restart of site construction is possible, while around 85% of employees are to be furloughed. 

Barratt shares rose by more than 2% in early market trading, though are down by more than 40% year-to-date. Rival housebuilders such as Persimmon (LSE:PSN), Berkeley (LSE:BKG) and Taylor Wimpey (LSE:TW.) have also suffered severe double-digit falls as sales and construction have been disrupted or closed and shareholder returns suspended.

Barratt had already cancelled its interim dividend of 9.8p per share announced at its early February half-year results, saving and conserving around £100 million.

Arch-rival Persimmon drew a line through its latest dividend on the same day. Even home selling site Rightmove (LSE:RMV) has subsequently moved to save itself nearly £40 million by doing the same. 

Other actions already taken by Barratt include postponing non‐essential expenditure and suspending all land buying activity.

Barratt, which normally employs over 6,000 staff across six regions and 27 operating divisions, is currently sat on cash of £450 million with further facilities of £900 million open to it. 

ii view:

Ultra-low interest rates and the government’s help-to-buy-scheme introduced in the aftermath of the 2008 financial crash have proved something of a boom for housebuilders. Barratt and Taylor Wimpey shares are both up over 200% over the last ten years – Persimmon and Berkeley Group shares are up over 300%. 

Rising house and land prices have helped housebuilders to make significant shareholder returns in recent years – both through dividend payments and share buybacks. At the turn of the year dividend yield at or close to double digits were not uncommon across the sector. However, while Brexit and Bank of England predictions for house price falls of potentially 30% did not hinder returns, Covid-19 has. 

For Barratt investors, a prior dividend yield in excess of 5% is not compensated for by a 40% share price fall year-to-date. Some customer cancellations have been suffered with build completions compared to last year now under severe threat. But, with interest rates even lower and Covid-19 potentially passing as quick as it came, prospects for Barratt could improve equally quickly.  

Positives: 

• Offers regional UK geographical diversity
• Focus on build quality and customer service compares well to some rivals

Negatives:

• Help to Buy scheme due to end in 2023
• Build costs have been rising

The average rating of stock market analysts:

Buy