Shares in housebuilder Barratt Redrow (LSE: BTRW) are in freefall. The share price has dropped 33% in the space of a month. Nearly £2bn in market cap has been wiped out in double quick time. The nation’s biggest company in the housing sector is on course to get booted off the FTSE 100 – there are already seven FTSE 250 stocks big enough to take its place on London’s premier index.
What on earth happened here? How have the shares in the company fallen so much while the country is crying out for new houses to be built?
More inflation
One large reason for the decline is – surprise, surprise – the fresh conflict in the Middle East and its consequences. The rising price of oil and shipping is likely to bring about high levels of inflation across many areas. This is exactly what housebuilders didn’t need — they have already been grappling with build cost inflation in recent years.
There’s a double whammy here too. Higher inflation is likely to cause banks to increase interest rates to deal with it. In the space of a week or two, we’ve gone from expecting rates to come down this year to now expecting one of more rate increases. Higher rates mean costlier mortgages, which means less demand for the houses that Barratt Redrow is building.
This is why other housebuilders like Persimmon (down 28% in a month) and Taylor Wimpey (down 24%) have also struggled of late. However, Barratt Redrow is the worst of the lot. So what else could explain why the stock is hurting so much more than its rivals?
Execution risk
Well, in addition to the raft of problems plaguing the rest of the housing sector, Barratt Redrow is dealing with the complexities that come from the recent acquisition. Remember, until 2024, Barratt and Redrow were two separate companies.
Why is this a problem? In short: execution risk. Mergers like this are typically done because those in charge can see benefits in streamlining organisations. The headline figure when the deal went through was £100m in efficiency savings. However, the early signs are that investors are concerned that things are not going swimmingly in this regard.
The drop in the shares has made the dividend one of the most attractive on the FTSE 100 – the yield has jumped up to 6.68% and the sixth highest on the index. Such a large dividend is nice for cash-in-the-bank purposes, but could also be a sign of an undervalued stock trading at a low ebb.
Is all that enough to make Barratt Redrow shares worth considering? I’m not so sure. There will undoubtedly be a turnaround for the notoriously cyclical housing sector at some point, but the latest signs suggest it’s unlikely to come our way soon. I think there may be better opportunities for investors to be focusing on now.
