Barratt cuts dividend amid housing slump

Housebuilders’ share prices wobbled on the morning of Barratt Developments’ (BDEV) results because bad news for Barratt means bad news for its rivals. The housebuilder posted a 16.2 per cent decrease in adjusted pre-tax profit and a 13.6 per cent drop in adjusted gross profit in its results for the year to 30 June.

The adjusted figures strip away post-Grenfell fire safety costs, with the housebuilder paying less out this year than last year, causing profits to rise on a statutory basis, and reflect a subdued housing market, with forward sales sinking 36 per cent by value when compared with this time last year. This disappointing underlying performance has resulted in a dividend cut.

Housing market forecasts have been doomy for a while now, but investors are struggling to price this in on a case by case basis. Housebuilders still rise and fall en masse depending on the mood of the day. Better-than-expected inflation figures sparked a sector-wide rally in July; Crest Nicholson’s (CRST) August profit warning hurt peers. These results saw shares in Barratt, Persimmon (PSN), Berkeley (BKG), Bellway (BWY) and Crest Nicholson (CRST) fall by 2 per cent in early trading before recovering slightly, and you could argue that the equity market has called that about right. After all, if Barratt is struggling to sell homes in a market where interest rates are high, what hope does any other housebuilder have?

We disagree with that line of thinking. Admittedly Barratt shares have held up well this year relative to the sector, but there are still qualities that are being overlooked. It is in the enviable position of having a much larger land bank and much deeper cash reserves than its peers. Take Crest Nicholson, for example. Where Barratt has £1.02bn in net cash, about a quarter of its market value, Crest has £61.4mn, about 10 per cent of its market value. Barratt’s scale and war chest mean it can ride out the tough market and buy land cheaply when the recovery comes. And its current land bank is about twice the size of Crest’s, too.

Considering how much bad news Barratt warned of in its trading update, we judge the market reaction to its full-year results as somewhat harsh. And the situation has arguably improved since then, with signs that we are approaching peak interest rates. Moreover, forward sales, though still down annually, have increased from £2.22bn on 30 June to £2.44bn on 27 August. Assuming those figures continue to trend in the right direction, this stock looks appealing. Hold.

Last IC view: Sell, 407p, 13 July 2023