An 8% yield tells me the Barratt share price could be about to soar
Share prices in the housebuilding sector have come under pressure recently as investors have worried about flat sales and rising prices.
Barratt Developments (LSE: BDEV) stock is worth 15% less than it was one month ago, despite the firm confirming today that it expects to report record profit for the year ending 30 June.
The share price edged higher on Wednesday morning but remains under 500p at the time of writing. At this level the shares offer a forecast ordinary dividend yield of 5.2%. When you include this year's planned £175m special dividend, the total forecast yield rises to 8.7%.
A strong year
During the year ended to June, Barratt sold 17,578 houses, the highest level since 2008. Sales rates were broadly unchanged and management expects to report a record pre-tax profit of £835m for the year. That's 9% ahead of last year's figure of £765.1m.
Net cash at the year-end was expected to be £790m, ahead of guidance and providing firm support for ongoing dividend payments. The company ended the year with a forward order book of £2,175m.
The recent sell-off in the housebuilding sector suggests that the market expects profits to fall. But analysts' forecasts for Barratt suggest that earnings per share could rise by about 5% to 67.6p next year. The tone of today's statement suggests to me that management is also confident in this outlook.
Clever building
One of the secrets to Barratt's resilient profits may be that it's invested in new housing designs that are faster and cheaper to build. These are being rolled out across the company's building sites and are expected to deliver higher profit margins. This means that even if house prices and sales volumes are flat, profits should rise.
Although I think the housebuilding sector carries some risk at the moment, my view is that Barratt shares look decent value at around 500p. I'd be happy to buy at this level.
Another 8% yielder
Housebuilders aren't the only stocks offering high yields at the moment. A number of out-of-favour retailers are also offering generous payouts.
One example is online fashion retailer N Brown Group (LSE: BWNG), whose shares currently offer a whopping forecast dividend yield of 8.7%. This former catalogue specialist has been investing in its online operations in recent years and now appears to be positioned for a return to growth.
Although the group reported net debt of £346.8m at the end of last year, most of this cash is used to fund the customer loan book. This was valued at £598m. So we can see that the value of the customer loan book comfortably cancels out the company's borrowings. As customer loans are an asset that could be sold to raise cash, I'd view this business as effectively being debt-free. The only risk is that customer defaults could rise sharply during a recession.
Too cheap to ignore
The shares appear to be extremely cheap, trading on about 7.4 times forecast earnings for the current year.
The main problem appears to be a lack of growth. Revenue rose by just 0.4% during the first quarter and profit margins are expected to be broadly unchanged this year, leaving profits largely unchanged. Despite this risk, I think these shares could be worth considering at current levels.
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Roland Head has no position in any of 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.
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