Barratt (LSE: BDEV) shares have been rocked by the economic worries of the last 18 months, and buying them isn’t without risk. I’m still tempted though.
FTSE 100-listed Barratt Developments is the UK’s largest housebuilder, which puts it on the front line if the UK suffers a house price crash. That’s a clear and present danger, as inflation proves stickier than hoped.
Last week’s decision by the Bank of England to hike interest rates for the 12th time in a row (to 4.5%) will pile further pressure onto homeowners. There could be more pain to come too, as analysts reckon base rates could soon hit 5%.
Risky but rewarding
Each time base rates rise by 0.25%, someone with a £250,000 variable rate mortgage pays an extra £420 a year in interest. With standard variable rate mortgages now charging 7.3% on average, 1.5m borrowers whose fixed rates come to an end this year are also in for a shock.
This could put downward pressure on property prices, with a knock-on effect for Barratt, especially if the market sees a wave of forced sellers.
Earlier this month, Barratt duly reported a drop in net private reservations per active outlet, from 0.93 to 0.65. Total forward sales, including joint ventures, dipped from £4.5bn on 23 April last year to £2.96bn this year.
Yet markets took those numbers on the chin, with the Barratt share price up 7.13% over the last month, and 21.69% over six months. Investors are sniffing an opportunity, after previous falls. Over one year, Barratt stock is up just 3.82%.
Investors have evidently decided the risks of buying Barratt are priced in to today’s valuation of just six times earnings. I think they also like the look of its forecast 6.7% dividend yield, which is covered twice by earnings. I certainly do.
Based on the 2022 dividend per share of 36.9p, I’d need to buy 3,905 Barratt shares to generate my £120 monthly income target. At today’s share price of 500.6p, that would cost me £19,548, which is virtually all of my ISA allowance.
Have I left it too late?
The maximum I allow myself to invest in any stock is £5,000, and I won’t change that for Barratt. If I invested £5k, I’d get income of £30 a month, or £360 a year. I’m talking as if dividends are guaranteed, which they’re not. If we get a full-blown house price crash, Barratt could cut its dividend or suspend it all together.
Yet management remains positive, noting that it’s fully forward sold for the current financial year. Its balance sheet remains strong as management anticipates year-end net cash of around £900m, which should help support that dividend.
As ever, these numbers are at the mercy of events. If inflation and interest rates stay high, market sentiment could fall into the abyss, and Barratt’s sales prices and profits could follow.
Investing £5,000 in Barratt shares would be risky today, especially since I have exposure to FTSE 100 housebuilders via Persimmon. I missed my chance six months ago, when it was even cheaper than today. So instead I’ll watch and wait, and pounce on any dip.
