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Why I’d buy the Barratt share price after these results

The Barratt (LSE:BDEV) share price is looking cheap for new investors after it dropped nearly 5% last week, despite strong full-year results for the 12 months to 30 June 2019.

Shareholders would be rightly miffed to see the stock plunge after a solid set of annual sales and dividend figures. The housebuilder reported increased profits based on higher margins along with increased dividends, as well as a plump special dividend. And yet the share price fell. Good results should mean the price trends upwards, right? What more does the market want?

You can buy-in at under nine times earnings, which from my perspective looks to be good value. Dividends approached a healthy 5% for the year. Earnings per share were over 10% higher for the year at 73.2p. Pre-tax profits have been up every year since 2014. Operating profits were 4.5% higher for the year at £900m.

Taking profits

Don’t panic, Captain Mainwaring, don’t panic! The old market adages are true, and this one especially so: “Buy the rumour, sell the news.”

Shares that are expected to do well can still fall after positive results. Traders will have seen that the news was good coming out of the Barratt camp ahead of time and taken their profits by selling as soon as the results dropped onto the mat. Hence the price decline.

If the underlying business is healthy — which I believe it is here — and there are no nasty surprises in the annual report, then the Barratt share price remains a solid buy for me.

Looking up

CEO David Thomas noted in the results how cash generation, vital for those dividends remaining on par, has been strong across the business. Dividends are now covered 2.5 times by earnings, giving management plenty of headroom to pay out to shareholders. Barratt also saw the highest number of home completions in 11 years, with 3% to 5% volume growth over the medium term.

The business model is clearly resilient as Barratt beat its own targets with a 29% return on capital employed (ROCE) for the period. My favourite fund manager Terry Smith of Fundsmith only buys shares with 25% ROCE and above.

Acquiring the profitable timber-frame manufacturer Oregon in June was another good move by top brass as it means Barratt can build new homes for a lower outlay. The housebuilder managed 18,000 new plots across the year, with targets higher at 22,000 plots next year.

London calling

A bit of sector-specific analysis here: retail real estate, that is, homes for families, is moving in the opposite direction to commercial real estate by moving more operations away from London. Another recent pick of mine, Land Securities, has a cast-iron 6%+ yearly dividend with dividends per share increasing every year. Consolidating its estate back towards the capital city will allow this FTSE 100 office developer and landowner to overcome losses in its last results and keep the share price buoyant. Barratt is going the other way, targeting high quality land buys outside London, specifically in Edinburgh and Oxfordshire, to keep its profit margins strong.

Still, one major headwind for housebuilders in general means that Barratt is only a medium-term hold for me. The government’s Help to Buy ISA has been a huge boon in bringing family buyers to the table despite the anxiety-inducing calamity of Brexit: that programme ends in 2023.

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Tom has no position in the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.