UK investors have dumped housebuilding stocks this year as rising interest rates have triggered fears of a housing slump. Shares in Barratt Developments (LSE:BDEV) have dropped by around 40% over the last 12 months.
One compensation for shareholders has been Barratt’s chunky dividend. The firm has made two payouts over the last 12 months, totalling 36.9p per share — a trailing yield of more than 5%.
However, my sums tell me that if I’d invested £1,000 in Barratt shares 12 months ago, I’d only have £660 today. That number includes dividends but excludes trading costs.
Clearly, that’s not a great result. But I don’t think that Barratt is necessarily a bad business. In fact, I feel this well-known housebuilder may offer good long-term value at current levels. Here’s why.
Long-term demand
I admit that things could get rocky in the housing market over the next year. Barratt’s home sales fell to an average of 188 per week between July and October. That compares to an average of 281 per week during the same period last year.
However, the shares didn’t fall when this news was announced. That tells me that the market had already priced bad news into the stock. The numbers weren’t a big surprise.
I also think that investors may be starting to look further ahead. Most people involved in the property market seem to agree that there’s a shortage of new housing in the UK. I expect long-term demand to remain strong, even if prices weaken a little.
Similarly, interest rates won’t keep climbing forever. Given the weak state of the economy, my guess is that the Bank of England will stop increasing rates as soon as inflation starts to ease. I expect that to happen some time next year.
An 8% dividend yield?
Barratt is one of the UK’s biggest and most successful housebuilders. It’s popular with buyers too — the firm has been awarded a five-star HBF customer satisfaction rating for the last 13 years.
In my view, this firm’s strong track record and mid-upper market positioning (average selling price £377k) make it a good choice for long-term growth.
Based on the latest broker forecasts, my sums suggest to me that there’s also a good chance the dividend will stay safe. That would give Barratt shares an 8% dividend yield — potentially locking in a very attractive long-term income.
My decision
The main risk I can see is that we’re going to have a much more severe recession than the market expects. That could have a knock-on effect on the housing market and cause a serious crash.
I can’t completely rule out this risk, or the possibility of a dividend cut. But Barratt has plenty of cash and very little debt. And with the stock currently trading below book value, I think Barratt’s share price already includes a margin of safety.
In my view, this FTSE 100 stock is now cheap enough to be a profitable long-term buy.
I already own some housebuilding shares, so I won’t be buying Barratt right now. But if I want to add more exposure to property, I’ll certainly consider this stock.
