It’s hard not to be tempted by the 8.9% dividend yield offered by Barratt Developments (LSE: BDEV), especially when you know that this payout is covered comfortably by profits and by the group’s £791m net cash balance.
The case for investing becomes even more compelling when we remember that earnings rose by 8.5% to 66.5p per share last year. A further increase of 2.4% is expected in the 2018/19 financial year, suggesting that the mighty dividend will remain safe.
It’s hard not to be tempted. But it is worth considering the reasons why investors have been selling the stock this year, pushing Barratt’s share price down by 25% to about 485p.
Risk vs opportunity
Fears about the end of the Help to Buy scheme have been pushed down the road. The Chancellor has now extended this scheme to 2023, with tapering from 2021. But builders are still facing rising costs and slowing sales, at least in the south east.
Another problem is that affordability remains poor in many areas of the UK, with house prices at record highs. As a result, a number of the firm’s rivals have said they’re focusing on building cheaper homes and build-to-rent properties.
These problems don’t seem to have affected Barratt so far. The group’s operating margin rose by 0.5% last year, during which the company built a record 17,579 homes.
However, there’s always the risk that Brexit will trigger a recession. Sales certainly seem to be slowing. The group’s sales rate fell to 0.72 reservations per outlet per week during the first 15 months of the year, down from 0.74 during the same period last year. Although this isn’t a big fall, my calculations suggest that this is equivalent to a 2% drop in private sales.
Buy, sell or hold?
In my view, Barratt Development’s share price already reflects some of the risks facing the company. The stock now trades at just 1.3 times its tangible net asset value, compared to a multiple of 1.8 times in November 2017.
If market conditions remain broadly stable, then I think Barratt stock looks quite reasonably priced at the moment. The shares could be worth considering as an income buy.
Strong residential growth
Another way to invest in the housing market is to buy shares in companies which supply housebuilders’ raw materials. One of my favourite stocks in this sector is plastic piping specialist Polypipe Group (LSE: PLP). This FTSE 250 company produces pipes for drainage, sewers, rainwater harvesting and ventilation systems.
In a trading update today, Polypipe said that like-for-like sales of residential products rose by 11.5% to £204.3m during the 10 months to 31 October.
Residential sales were said to be strong in the new-build housing market, but weaker in the ‘RMI’ market — repair, maintenance and improvement. This may suggest homeowners are cutting back on spending on their homes.
Like-for-like sales of commercial building and infrastructure products rose by 8.6% to £161.6m. The company says this growth was driven by new products such as a “tall building soil and waste solution” and a “large diameter sewer and drainage range”.
Management guidance for the full year remains unchanged. Although I would expect sales to fall during a recession, I rate this business highly and would quite like to own the shares. Trading on 13 times forecast earnings with a 3.2% dividend yield, I’d rate Polypipe as a stock to buy on the dips.