As we headed towards New Year 2023, I picked Barratt Developments (LSE: BDEV) as my top UK stock for investors to buy in 2023.
Well, what a year it’s turned out to be for our housebuilders so far. And not in a good way. But can I stick my neck out and still rate this stock so highly?
Well, since the start of the year, the Barratt Developments share price has actually gained a little, up 4%.
Mortgage rates
The stock had, though, been doing pretty well until May. And then it plunged again when inflation didn’t fall as quickly as we’d hoped, and the Bank of England kept on cranking up interest rates.
Over five years, the price has been on a wild ride up and down. It soared before the pandemic, then crashed, then climbed right back up again. But since the start of 2022, it’s dropped like a stone.
But, you know, the fact that Barratt shares are actually up on the year so far says something to me.
It suggests the stock is resilient, and that it might have passed the low point now.
No timing here
But picking the bottom wasn’t part of my thinking when I went for Barratt in December. And it’s certainly not now. No, my choice was based on the long-term outlook for builders in general, and this firm specifically.
On that score, I don’t think all that much has changed.
House prices dropped 3.5% in the year to June. And thanks to inflation and supply problems, the cost of building materials is up. So that puts a squeeze on short-term profit margins.
And that in turn looks set to put some pressure on the dividend.
Dividend outlook
Right now, forecasts suggest a dividend yield of 8.6% for this year. That would be a great return if it comes off. But it’s almost sure to fall in 2024, with a drop to under 5% already marked in.
We’re looking at a price-to-earnings (P/E) ratio for 2023 of under seven, which looks like a steal at first glance. But the expected fall in earnings next year would lift the P/E up to around 12.
So yes, we could well have a few years of weak dividends now.
Long term
But the 2023 outlook itself is not why I’d buy Barratt shares. No, what I want are the dividends that I think will come our way over the next 10 or 20 years.
If and when things get better and the cash starts to flow again, I reckon the share price should get a nice boost too.
And as for the long term, I really don’t think anything has changed. I still see persistent long-term demand, in a defensive business that’s strongly cash generative.
Yes, some of the risks I feared are here now, and we could see a weaker second half. But Barratt Developments is still high on my list for my next buy.
