2018 has proved to be a disappointment for the FTSE 100’s home-builders after the sterling gains of last year.
Take Barratt Developments (LSE: BDEV). Being a long-standing shareholder in the business, I delighted with the near-50% share price ascent of 2017. Its market value has contracted by a fifth in the year to date, however, something which is reflecting increasing investor concerns over the strength of future homebuyer demand as we approach the planned Brexit date.
Homes demand remains strong
Still, buyer demand in the face of this tougher economic climate remains pretty robust. Latest Bank of England data showed the number of mortgage approvals for property purchase rose to 66,440Â in August, the highest level since the start of the year.
Of course, homebuyer confidence is not as robust as it was a few years ago. But put simply, there still aren’t enough houses to go around. Favourable mortgage rates and the assistance provided by the government’s Help To Buy programme is enabling demand to continue outstripping supply and driving sales of new-build properties like those offered by Barratt.
I don’t expect a colossal drop in house sales to transpire any time soon. And I reckon the market will wake up to this fact – sooner rather than later – and consequently push Barratt and its peers’ share prices northwards again. A low, low forward P/E ratio of 7.4 times certainly leaves plenty of room for this to happen.
Decisive steps
Now the Footsie’s builders are on course to see profits growth plummet from previous years, due to the recent slowdown in property price expansion. The City is expecting earnings at Barratt, for example, to keep decelerating from the monster double-digit-percentages, seen as recently as a couple of years back, to just 3% in the fiscal year to June 2019.
The company is taking steps to combat the calming in home values, though. It’s focussing more greatly upon new housing ranges which are quicker to put up and cheaper to produce through lower build costs and reduced waste, thus boosting margins. Barratt is also upping its production target to between 3% and 5% each year to further energise the bottom line. Such manoeuvres are currently being celebrated by the market, but I’m convinced that they should help profits growth to recover over the medium term.
Dividend outlook remains strong
Barratt’s biggest quality is undoubtedly the robustness of its dividend picture. There’s plenty of big yielders out there on the FTSE 100 but, unlike BT and Centrica and Marks & Spencer to name just a few, the home-builder isn’t in any danger of freezing, or even cutting, shareholder rewards any time soon.
Net cash boomed 9.3% in fiscal 2018, to £791.3m, and this exceptional cash generation means that Barratt is in great shape to keep on raising the total annual payout through a combination of special and ordinary dividends. Indeed for this year, City analysts are predicting a 45.1p per share reward, up from 43.8p last year, and resulting in an eye-watering 8.9% forward yield.
This figure, allied with its dirt-cheap valuation, makes Barratt a terrific blue chip to buy today. And I think it’s just a matter of time before its share price bounces back.