Barratt at 498p is a great total return of capital gain and dividend buy

Barratt at 498p is still running strong on fundamentals and a great total return of capital gain and dividend buy.

The full year results for Barratt Developments, (498p last seen) have contributed another lighted match to the bonfire of views on house building shares. Their share price has after all, had one hell of an upward performance in the last six weeks or so. Barratt’s share dropped like a bucket down a well of despair to just below 340p after the referendum “Leave” vote. Now a few weeks later, it is some 66 percent higher at 501p.

If the Cameron government had survived with George, Gideon, Osborne still as Chancellor of the Exchequer then it seems probable that that we might not have seen that recovery in builders’ share prices. One reasonably supposes that George would have stuck to his philosophy of giving priority to the National Accounts with more “austerity cuts” and an increase in interest rates to protect sterling and prevent hot money leaving the UK. In that case the bearish view of building shares would have been vindicated by events.

Their rocket-like recovery was due in part due to a seemingly more pragmatic minded Mr. Hammond as his successor as the head of Treasury as well as the arrangements put in place by the Bank of England against his own fears by slashing interest rates to almost nothing and increasing liquidity to borrowers and markets. It is worth adding that the reason we have not had a hard post-Brexit landing for the UK economy is immediately due to the measures that the Governor put in place to neuter his understood and stated worries. The politics and financial economics of the Brexit situation are dynamic not static: too dynamic to justify the immediate euphoria from the so-called ‘Brexiteers’, who have greeted the current reassuring position as proof positive of their correct prophesy and the fallibility of ‘experts’ like the culpable Mike Carney of Threadneedle Street.

All of that is witch doctor nonsense and politics.  It is a bit like a doctor – non-witchcraft variety – saying that a patient will die without the medicine, administering it and then being accused of being wrong by bystanders who ignore the effect if the medicine. Speaking as a commentator on share prices and markets, I worry about the current mood of euphoria which may be dispelled when the public begin to feel the effect of significantly rising household prices this winter. Short of a miracle, that post Brexit hard bearish fact looks inevitable.

So is the logical consequence of that kind of thinking and analysis, consistent with a bullish or bearish of builder’s shares in general and Barratt’s in particular?

In the case of Barratt Developments, I continue to be bullish for a bit more capital gain to come. In short, at this stage I am not judging the shares to be a long term buy but a play for a short term capital gain of probably about 10 percent. These shares do not look like a sell at this juncture. Here are my reasons.

First, “technically” speaking the latest share price chart seems to suggest that the share price rally for Barratt shares which began in late June is still in place. A glance at the chart suggest to my subjective eye that the Barratt share price appears to be on a trend support line which if correctly surmised, could take the share price up towards 570p – a rise, which if achieved, means a further 10 percent rise or so.

Technicalities like that of course, are never sufficient. They need the flying buttress support of some more fundamental considerations. And in the case of Barratt’s we seem to have them. But first a little analysis.

If you look at the accounts you will see that operating cash flow in the last year to 30th of June 2016 was down a whopping  24 percent from £242 million to £184 million, despite a thunderous 47 percent increase in reported net income. The reason for that seems to be largely because much of the cash was still in the business as working capital which shall, if demand and prices hold up, be turned into more profits and earnings. Is that likely or will that cash run the risk of turning out to be loss making?

First, the market need addressed by Barratt Developments is one of a historic and significant lack of physical demand for homes and houses in the UK – even at these prices. In an attempt to bridge that gap in affordability for the benighted subjects and citizens of nation, the government has ‘help to buy’ measures in place. Moreover, as I saw on my ‘telly’ the other day, it puts more than a big devaluation the pound to put off all foreign speculative buyers, like the Chinese lady buying several flats in a North London  Colindale development (also a new way it seems to overcome that big rise in stamp duty on single, more palatial buys ‘up West.’) Indeed, the fact that Sterling has fallen so much only seems to add to speculative house and flat buying from abroad.  Furthermore, in principle at least, ‘buy to rent purchases’ may have lost some deductable interest allowance but thanks to the Bank of England, they now have less interest to pay anyway. It is also reported that such purchasers are getting that tax deductable allowance back by acting as, short contract, holiday letting suppliers.

Another fact is that that the dividend is currently too high. The final dividend rose 19 percent to 12.3p – itself worth 2.45% of dividend yield. The consensus estimate is that the dividend payout for this year is forecast to be above 31p implying a forward estimated divided yield of 6.3%. That looks solid, given the big cash dividend cover in the last balance sheet. A solid looking short term buy in my view.