Barratt (LSE: BDEV) shares have done badly for long enough to make me really, really want to buy them for long-term passive income and growth.
They’re now so cheap, trading at just 5.2 times earnings, that I’m longing to fill my boots. And the yield is so high, at 7.71% a year, that I can’t wait for the dividends to start rolling into my portfolio.
It’s just too tempting
Unfortunately, what tempts me also terrifies me. In crude terms, Barratt stock is cheap and the yield so high because its share price has struggled for years. The FTSE 100 housebuilder’s shares are down 13.17% over five years, and 4.24% over 12 months.
The construction sector was slammed by the June 2016 Brexit vote, and apart from the occasional spike, it’s trailed ever since.
Hopes of a recovery were destroyed by April’s shockingly high inflation figure. Since then, mortgage lenders have been frantically pulling and re-pricing deals, in a big squeeze on buyers and prices.
More than a million homeowners on fixed rates will see their mortgage repayments double when their current deal expires. Those on variable rates are already feeling the pain. Buy-to-let landlords are fleeing in droves. Latest Nationwide figures showed prices falling 3.4% in the year to May. We can’t rule out a crash.
House prices have been inflated by a dozen years of dirt-cheap cheap money. But with base rates potentially hitting 6% we’re now facing the reckoning. Is this really a time to buy housebuilders?
Personally, I think we’re at the point of maximum gloom. If inflation dips in May or June, (and it’s falling in the US and Europe) sentiment could swiftly pick up. Buying Barratt shares is still a gamble, though.
This company looks resilient
Last month, management reported a drop in total forward sales from £4.5bn to £2.96bn. Barratt has to cope with rising costs like everyone else, and potentially labour shortages too. Analysts expect 2023 net income of £657m, falling to £408m in 2024.
Yet its balance sheet remains solid with around £916m of net cash, which is forecast to creep up to £1.06m next year, offering support for that dividend.
Markets expect Barratt to pay a full-year dividend of 34p a share in 2023. Taking that rate, I’d need to buy 3,529 shares to generate my income target of £1,200 in year one. At today’s price of 482p, that would cost me £17,001, which is most of my ISA allowance for this year.
My limit for any single stock purchase is £5,000, which would still generate income of more than £350 a year. Dividend income is not guaranteed, and I accept that this could fall next year. However, I’m looking to hold Barratt stock for a decade and ideally longer, giving it plenty of time to recover and grow.
So would I buy Barratt shares today? I’ve had my eye on them for ages, and yes I would. I do have exposure to the housing market already via Persimmon, but that’s quite a small stake.
I’ll aim to buy as soon as I have cash to hand, but certainly before the next ex-dividend date, which hasn’t been announced yet. I don’t want to miss my first shareholder payout.
