Interactive Investor

ii view: Barratt Developments gets back to work

The dividend has proved a casualty of Covid, but demand for houses looks evident.

6th July 2020 15:02

Keith Bowman from interactive investor

The dividend has proved a casualty of Covid, but demand for houses looks evident. 

Trading update for the year to 30 June

  • Build completions down 29% to 12,604
  • Forward order book up 25% to £3.25 billion
  • Year-end net cash of £305 million
  • Dividend payments suspended

Chief executive David Thomas said:

"Prior to the Covid-19 pandemic, the Group was delivering a strong year of progress on both volume and margin. The pandemic has caused significant disruption, but our highly skilled and experienced team have shown incredible resilience, flexibility and commitment both through the peak of the crisis and in the careful reopening of our sites.

"Now, with our construction sites operational across the UK, we begin the new financial year with cautious optimism supported by our strong forward order book and our well capitalised balance sheet."

ii round-up:

Housebuilder Barratt Developments (LSE:BDEV) builds nationally, employing over 6,000 people across six regions and 27 operating divisions. 

Approximately two-thirds of its builds are three or four bed houses. Its brands are Barratts, David Wilson and Wilson Bowden.

For a round-up of this latest trading update, please click here.

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 boon for housebuilders. Barratt and Taylor Wimpey (LSE:TW.) shares are both up over 400% over the last 10 years, and Berkeley Group (LSE:BKG) shares just under 400%. Persimmon (LSE:PSN) shares are up over 500%. 

Rising house and land prices have helped housebuilders make significant shareholder returns in recent years – both through dividend payments and share buybacks. At the turn of the year, dividend yields 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 sector returns, Covid-19 has. 

For investors, the scrapping of both ordinary and special dividends for the financial year ended late June removes what was a core attraction. A decline in the share price of around 30% year-to-date adds further to shareholder misery. But all operational sites are now back open, with management fully aware of the importance of dividends to shareholders amid record-low interest rates post the pandemic. Barratt is highly regarded, and evidence of demand for new homes is welcome, but a possible second Covid spike remains a threat.

Positives: 

  • Offers regional UK geographical diversity
  • Forward order book up 25% to £3.25 billion

Negatives:

  • The drop in build completions will impact earnings
  • Dividend payment suspended

The average rating of stock market analysts:

Strong buy

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