FTSE 100 homebuilder Barratt Redrow’s (LSE: BTRW) share price has seen positive follow-through after its fiscal-year 2024/25 results.
I am surprised, as the 17 September numbers – the first since the 2024 merger with Redrow – looked excellent to me.
Revenue soared 33.8% year on year to £5.578bn, as home completions rose 18.3% to 16,565. Adjusted profit before tax jumped 26.8% to £591.6m.
Barratt expects 17,200-17,800 home completions this year.
However, the firm made it clear that there are risks to these projections, which I think are accurate. Specifically, Barratt warned of ongoing uncertainties surrounding general taxation and that applicable to housing.
And more broadly it said: “It is vital that government policy is focused on reforming the planning system, removing barriers to investment and supporting purchasers”.
In my view, the big near-term risk is a rise in stamp duty in the upcoming 26 November Autumn Budget.
The share price-valuation gap
A stock’s price is not necessarily the same as its value – in fact, it rarely is, in my experience. This comprises several years as a senior investment bank trader and decades as a private investor.
Specifically, a share’s price is just whatever the market is prepared to pay for it at any given time. But its value is based on the fundamentals of the underlying business.
Knowing this and being able to accurately quantify the price-valuation gap is key to major long-term profits.
I have found the discounted cash flow (DCF) method is the best way of doing this. It pinpoints the price at which any stock should trade, derived from cash flow forecasts for the underlying business.
In Barratt’s case, the DCF shows its shares are 44% undervalued at their present £3.76 price. Therefore, their fair value is £6.71.
In my experience as well, asset prices tend to converge to their fair value over time.
Dividend yield forecast to rise to 6.9%
The firm paid a total dividend this year of 17.6p – up from 16.2p in 2024. The current payout gives a dividend yield of 4.7%, compared to the FTSE 100’s present 3.4% average.
However, the dividend is set to fall this year, to 16.3p, pushing the yield down to 4.4%. After that, though, analysts forecast it will rise to 19.7p in fiscal year 2026/2027 and to 25.9p in 2027/28.
These would give respective dividend yields of 5.3% and 6.9%.
For investors considering a holding of £11,000 (the average UK savings) in Barratt, a 6.9% yield would generate £10,888 in dividends after 10 years. This involves reinvesting the dividends paid (dividend compounding).
After 30 years on the same basis, this would rise to £75,658. Adding in the initial £11,000 investment and the Barratt holding by then would be worth £86,658. And this would pay £5,979 in yearly dividends!
Will I buy the stock?
I recently bought Taylor Wimpey shares, and having two stocks in the same sector would unbalance my portfolio.
I still think they are a better buy than Barratt. They have a much higher dividend yield and are even more underpriced to their fair value. However, if I were to add another building stock, Barratt would be it.
And other investors may prefer it as a first choice, based on the investment parameters of their own portfolios.
