At present, only a handful of companies in the FTSE 100 offer a dividend yield greater than 10%. One such name is leading housebuilder Barratt Developments (LSE: BDEV). A plummeting share price has helped push its yield close to 11%. But as major cracks begin to appear in the housing market, is this yield sustainable?
Cooling housing market
Yesterday, Barratt updated the market and it did not make for pleasant reading. In response, its share price fell 5% and now sits at levels not seen since 2013.
Net private reservations per average week for the period July to September stood at 188, a fall of 34% from the same period last year.
Against a backdrop of high-inflation, a growing cost of living crisis and rising interest rates, the fall is unsurprising.
House price inflation, for now, remains robust. The average selling price in its forward book as of this month is £377,200. This represents a 9.5% rise on last year. However, this increase is being offset by build cost inflation, which is estimated to be 10% through 2023.
Mortgage rates
In order for the housing industry to grow new homes supply, it’s vital that homebuyers are able to access affordable and competitive mortgage finance. This looks increasingly under threat.
A few months back the mortgage market looked reasonably healthy. Offsetting the imminent closure of the Help to Buy scheme, banks had been increasing the availability of 95% loan-to-value (LTV) lending.
Deposit unlock, a brand-new scheme developed in collaboration between industry and lenders, enables first-time buyers and existing homeowners to purchase a new-build home with a 5% deposit.
The recent turmoil in the bond market, though, has had a direct knock-on effect on mortgage availability. Banks acted swiftly, both raising rates and withdrawing a number of products from the market.
Today, the Royal Institute of Chartered Surveyors (RICS) warned that rising mortgage rates will likely drive house prices down. With so much money tied up in land banks and existing developments, that will inevitably lead to a strain on Barratt’s balance sheet.
Dividend yield sustainability
Its juicy dividend yield is certainly enticing. The company has also instigated a £200m share buy-back programme.
However, given all of the above, I find it hard to believe that its inflation-beating yield won’t be cut in the near future. It’s already forecasting a reduction in net cash during the next quarter, reflecting investment in land and work in progress to support growth in home completions.
Dividend cover is a further concern to me. The group has implemented a phased reduction in dividend cover of 0.25 times per year to stand at 1.75 times in FY24. This suggests to me that it’s expecting earnings per share (EPS) to come under strain.
A positive case can clearly be made for buying Barratt shares. Aspirations of home ownership remain high in the UK and demand continues to outstrip supply.
However, its multi-year-low share price reflects a new economic reality. Although I’m not expecting anything quite like the meltdown that happened during the global financial crisis, I’m of the view that the share price has further to fall in 2022. I will, therefore, wait for a more attractive entry point before buying.
