Why I believe the Barratt share price could soon return to 650p

Roland Head explains why he’d keep buying Barratt Developments plc (LON:BDEV).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Today’s trading statement from FTSE 100 housebuilder Barratt Developments (LSE: BDEV) confirmed my view that these shares could soon return to 650p, a level last seen in January.

The 7.4% forward yield continues to be supported by net cash, which is now expected to be “around £550m” at the end of June. That’s 10% ahead of previous guidance. Management has confirmed that the firm remains on track to return £1.9bn of cash to shareholders during the five years to November 2019.

Making houses more profitable

So far this year, Barratt has sold an average of 302 houses a week, compared to 299 during the same period last year.

Should you invest £1,000 in Barratt Developments right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barratt Developments made the list?

See the 6 stocks

However, the company says that engineering and design changes to its housing range “should increasingly benefit” the firm’s profit margins. The new designs are already being constructed on 85 sites, with more planned.

Today’s sales figures suggest to me that pricing remains stable. Total forward sales are 2.5% higher at £3,286.7m, compared to the same point last year.

Despite concerns that higher costs could reduce profit margins, this doesn’t yet seem to be a problem. The group’s operating margin rose from 17.8% to 17.9% during the first half of the year and management says it is “on track in implementing our margin improvement initiatives.”

I’d still buy

It seems possible that the UK housing market may have peaked. But demand for new houses appears to remain very strong.

I expect Barratt’s performance to be sustainable while the UK economy remains stable. With the stock trading on less than 9 times earnings and offering a cash-backed 7.4% dividend yield, I’d rate these shares as an income buy.

An alternative choice?

If the outlook is bright for housebuilders, what about other housing-related stocks? One of the companies I rate most highly in this sector is kitchen supplier Howden Joinery Group (LSE: HWDN).

This company sells directly to the trade, meaning that it supplies over 400,000 small builders and other tradesmen from its network of about 650 branches. Although some of these customers are building new houses, many of them are fitting new kitchens to existing homes. So the company’s exposure to the housing market and the economy is slightly different to that of housebuilders.

Are further gains likely?

Howden shares have doubled in value over the last five years. One reason is that this is a very profitable business. The group’s return on capital employed (ROCE) was 41% last year. This means that the firm generated £41 of operating profit for every £100 invested in its operations. That’s an outstanding figure.

A high ROCE generally results in strong cash generation, and that’s certainly the case here. Howden’s net cash balance has risen £95.4m to £241.1m since 2012. Over this time, the firm has also bought back nearly 5% of its shares and increased the dividend from 3p to 11.1p per share.

Too late to buy?

Earnings are now expected to climb 7% to 31.9p per share this year, while the dividend is expected to rise to 11.9p. These forecasts put the stock on a 2018 P/E of 16.1, with a prospective yield of 2.3%.

Although I think this is a fair price for a high quality business, the risk of a slowdown in consumer spending means that these shares aren’t without risk. I’d rate the stock as a hold at current levels, but would be happy to buy on any dips.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

With a £20k Stocks and Shares ISA, here’s how to aim for passive income of £228,688!

A £20,000 Stocks and Shares ISA could be an absolute passive income goldmine over the long term. Our writer explains…

Read more »

Two elderly people relaxing in the summer sunshine Box Hill near Dorking Surrey England
Investing Articles

FTSE 100 shares: a long-term chance to get rich?

This writer believes it is possible to build long-term wealth by building a portfolio of carefully chosen, attractively priced FTSE…

Read more »

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

What sort of shares can make sense to buy for a SIPP?

Thinking about the right shares to buy for a SIPP can involve a long-term view and some self-awareness. Here, our…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how £20k of savings could one day generate £841 of monthly passive income

A passive income plan built around investing in dividend shares could be a simple but potentially lucrative way to earn…

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

Prediction: in 12 months, the recovering aberdeen share price could turn £10,000 into…

After a terrible run the aberdeen share price is finally showing some zip and Harvey Jones says the FTSE 250…

Read more »

Illustration of flames over a black background
Investing Articles

Here’s a FTSE 100 insurer to consider buying for a SIPP

Our writer looks at the pros and cons of including one of the Footsie’s insurance companies in a Self-Invested Personal…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should every investor be like Warren Buffett and have an insurance company in their portfolio?

Berkshire Hathaway, Warren Buffett’s investment vehicle, has been a long-time investor in insurance. Our writer takes a closer look at…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

3i Group: unravelling the finances behind one of the FTSE 100’s most profitable companies

Mark Hartley breaks down why 3i Group's one of the most profitable companies on the FTSE 100, and the risks…

Read more »