The Motley Fool

Neil Woodford’s favourite housebuilder isn’t the only 6%+ yielder on offer today

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.

Image of person checking their shares portfolio on mobile phone and computer
Image source: Getty Images.

Barratt Developments (LSE: BDEV) is the largest holding of several housbuilders in Neil Woodford’s portfolios. As of 31 December, it ranked at number six in his flagship Equity Income fund, with a weighting of 2.8%, and at number eight in his Income Focus fund, with a 2.9% weighting.

He built his stake in Barratt during 2017, as part of a broad repositioning of his funds to capture what he sees as “a contrarian opportunity that has emerged in domestic cyclical companies where valuations are too low and future growth expectations far too modest.”

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

During October, he sold his holding of mid-cap international insurer Lancashire (LSE: LRE) to further increase his stake in Barratt and a number of other UK-focused FTSE 100 stocks. I’m not convinced that selling Lancashire, which announced its annual results today, was a good move. At the same time, I reckon buying Barratt is fraught with danger.

Lots of positives

The UK’s largest housbuilder is set to release its interim results for the six months ended 31 December next Wednesday. They’re going to be good because the company told us in January that it had “delivered a strong performance in the first half.”

In the same update, Barratt pointed to a string of positive features for the business, including good mortgage availability, a supportive Government policy environment, attractive land opportunities and its “healthy forward order book.” And the board reiterated its commitment to pay a £175m special dividend for the year.

At a current share price of 550p (over 20% down from last year’s post-financial-crisis high of above 700p), Barratt trades on just 8.5 times forecast earnings, while the forecast dividend (ordinary plus special) gives a yield of 7.9%. What’s not to like?

Downside risk

I have several concerns. Housebuilders have enjoyed a terrific bull run since the financial crisis, but this a notoriously cyclical boom-and-bust industry. Housing fundamentals may look good currently and the earnings multiple and dividend yield may scream ‘bargain’ but things can change quickly and other metrics — price-to-book and margins — suggest we’re at or near the peak of the cycle.

And with government stimulus measures also at full throttle and rising scepticism about their effectiveness, I believe risk has turned very much to the downside. As such, I’m inclined to rate Barratt a ‘sell’.

Dealing with catastrophe

Insurance is also a cyclical business and as Lancashire’s results today revealed, 2017 was a bad year for catastrophe losses, with hurricanes and wildfires taking a heavy toll. The company posted a $71m loss compared with a $154m profit in 2016.

However, managing such extreme years is all part of the business. While a loss is never welcome, the company was pleased that its risk management model passed this “real-time ‘stress test’.” In fact, Lancashire is a consistently well-managed business and has returned almost all of its profits to investors via dividends since becoming a public company. The annualised total return over the past 10 years is an impressive 16%, compared with 6% for the FTSE 100.

There was no special dividend for 2017, with shareholders having to settle for the modest regular ordinary dividend of $0.15 (10.6p at current exchange rates). The shares are almost 7% down on the day at 610p but the City expects a rebound in earnings and dividends in 2018. The forward P/E is 13, the prospective yield is 6.2% and I rate the stock a ‘buy’.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.