Star stocks: Barratt Developments and Redrow thriving

by Graeme Evans from interactive investor |

Already up over 20% following December’s UK election, both housebuilders remain popular. 

Barratt Developments (LSE:BDEV) and Redrow (LSE:RDW) had no trouble meeting the bullish expectations of investors today as the post-election bounce driving housebuilding stocks in 2020 continued.

FTSE 100 index-listed Barratt demonstrated its confidence by extending the company's capital return plan for another year, with special returns of £175 million now anticipated for both November 2020 and 2021 on top of the normal dividend awards.

Redrow also sounded an upbeat note as it said current market conditions and a “very strong order book” meant it should deliver another year of progress in 2020.

The pair's respective interim results kept up recent share price momentum, with Barratt shares up 4% to within sight of the record set in 2007. Redrow, which climbed 1% today, is already trading at an all-time high after rallying 33% since early October.

Source: TradingView Past performance is not a guide to future performance

We highlighted Redrow's potential back in September, when UBS analyst Gregor Kuglitsch noted the housebuilder was trading at a 20% discount to the rest of the sector. This view was subsequently endorsed by counterparts at Peel Hunt, who picked Redrow as one of 27 under-valued companies for investors to consider in 2020.

Kuglitsch thinks there's potential for Redrow shares to break the 1,000p barrier for the first time, helped by today's interim results being slightly above his estimates. Revenues of £870 million were 2% higher than UBS forecast, with pre-tax profits 1% above at £157 million.

While both metrics were down on the figures reported last year, Redrow has already told the City that its performance will be more weighted towards the second half.

Kuglitsch said:

“Commentary on current trading suggests it remains supportive and the expectations for the year are unchanged. A positive sign is that the first half gross margin was broadly flat at 23.9%, with the impact of build cost inflation mitigated.”

A special dividend from Redrow is not expected in 2020, but analysts reckon there's likely to be capacity for a resumption in 2021 onwards. Numis Securities noted today that Redrow's 2020 price/earnings multiple of 8.6x was still towards the lowest in the sector, which they said looked to be “somewhat unjustified”.
Barratt Developments, meanwhile, will continue to return cash to shareholders after it ended the half year with net cash of £433.8 million and a well-capitalised balance sheet.

It said the housing market fundamentals were also attractive, with greater competition in the mortgage market and continuing Government support following December's election meaning Help to Buy will remain in its current form for another two years.

Today's results showed a 3.7% rise in pre-tax profits to £423 million after Barratt's best half-year for home completions in 12 years at 8,314. The adjusted margin was stronger at 19.4%.

Trading in January was also encouraging, with sales per site up 12% and prompting Kuglitsch to speculate whether Barratt is on track for the upper end of its full-year guidance for volumes growth of between 3% and 5%.

He has a price target of 860p, having already seen Barratt shares jump 55% over the past year. This performance made the company the powerhouse of interactive investor's 2019 portfolio of 10 stocks to deliver a £10,000 annual income.

Today's dividend was lifted by 2.1% to 9.8p, with shareholders due to receive the payment on May 11. Chief executive David Thomas added:

“Demonstrating the board's confidence in the business going forward, it now proposes to pay a further special return of £175 million in November 2021.”

This may be made through share buybacks, special dividends or a combination of both.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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