Shares in the UK’s biggest housebuilder Barratt Developments (BDEV) continue their recent run of good form adding 3% to 565p on today’s first half update.

Total revenues were up 7% in the six months to the end of December to £2.1bn driven by a 4% increase in completions and a small increase in the average selling price.

Shareholders are also celebrating the extension of Barratt's capital return plan with another £175m in special dividends set to come their way next year.

STRONG FUNDAMENTALS

Thanks to operational improvements and a high hurdle rate on new land purchases, the gross margin rose to 22.6% against 20.6% a year earlier and just 14.2% five years ago when Barratt set out its medium-term goals.

The company’s balance sheet is strong with net cash of £387m, more than double the amount in the same period a year ago.

Moreover its return on capital employed (ROCE) is an impressive 29.5% against a self-imposed target of at least 25%.

Housing market fundamentals are also strong despite various house price indices looking like they may have topped out in recent months.

The government has set a target of 300,000 homes to be built each year and local authorities are being held accountable if they don’t ‘plan positively’ as the company puts it.

The mortgage market is also supportive with low interest rates and more lenders competing for business, while Help To Buy is set to continue to 2023 in one form or another.

As of June last year a total of 184,000 homes had been bought using Help To Buy with over 80% of purchases coming from first-time buyers.

ATTRACTIVE VALUATIONS

We turned positive on the housebuilders last month on the basis of their compelling valuations and the prospect of generous returns underpinned by strong balance sheets.

At the start of the year the housebuilding sector was trading on a multiple of less than 1.3 times net asset value (NAV), a level last seen in the immediate aftermath of the EU referendum in 2016.

Similarly, on a price to earnings basis the average multiple in early January was 7.7 times compared with 7.5 times in July 2016.

At these levels the sector was pricing in a 5% fall in selling prices and a 10% fall in volumes according to analysts at Cannacord Genuity.

Set against these valuations were dividend yields of just under 10% at Barratt and 11-12% at Bovis (BVS), Persimmon (PSN) and Taylor Wimpey (TW.).

INCREASING SHAREHOLDER RETURNS

Often when yields are this high investors are right to be wary as it could be a sign that the market thinks the dividends are going to be cut.

At one stage failed outsourcer Carillion was theoretically yielding close to 20% which investors knew was clearly unsustainable.

However the housebuilders are generating significant amounts of free cash flow and by limiting their investments in new land they are building up large cash piles.

Up to December Barratt had paid out just under £700m in ordinary dividends and £474m in special dividends under its capital return plans.

Before today there was one more special dividend payment of £175m scheduled for November of this year along with an ordinary dividend of £277m.

Today’s announcement however proposes a further £175m of special dividends to be paid in November 2020.

This takes the total return to shareholders including special dividends to over £2bn since the plan was launched five years ago.

Capital Return PlanOrdinary Div £mSpecial Div. £mTotal £m
Total to Nov 2018697.6474.31,171.9
Year to Nov 2019271.9175446.9
Year to Nov 2020276.9175898.8
Totals1,264.4824.32,070.7

Disclaimer: The author owns shares in Barratt Developments

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Issue Date: 06 Feb 2019