Shares in housebuilder Barratt Redrow (LON:BTRW) gained on news the firm will return £400 million of capital to investors. The company made the announcement alongside its trading update for the year to end-June.
Returning cash to create value
Despite a ‘challenging’ market, Barratt Redrow completed 17,667 homes, at the top end of its guidance. These included 566 homes from joint ventures and 3,774 affordable homes, 27% more than in FY25.
Net private reservations, a key measure of demand, edged up to 0.64 units per outlet per week. As a result, for FY27 the firm expects to complete between 17,700 and 18,200 homes including 600 from joint ventures.
Based on market conditions, average selling prices are seen flat while build cost inflation could be 3% to 4%. However, the firm is in a strong position financially with net cash of £772 million.
Given headwinds from mortgage rates and subdued customer demand, the board has decided returning cash is the most effective way of creating long-term shareholder value. Therefore, the firm will pay just a 1p final FY26 and interim FY27 dividend and supplement these with buybacks.
Unsurprisingly, the market likes the idea of Barratt Redrow returning close to £400 million or 10% of its market cap through buybacks. It certainly has the balance sheet strength to do it, thanks to lower investment in land and work in progress.
We’re generally not big on buybacks, as they tend to be indiscriminate, but in this case the board has a point. Since the interims in February, the share price discount to tangible NAV (net asset value) has balooned from 9% to 36%.
Given the firm’s level of excess cash, buying in the shares at a material discount undoubtedly adds more value than dividends. Going forward, it will return 50% of adjusted net income to shareholders, mostly through buybacks, while paying just a nominal 1p dividend.
Major shareholder Phoenix Asset Management Partners had publicly called on the board in June to buy back more shares. In a press release today, it revealed other shareholders had reached out to it expressing ‘broad support’ for its proposal.
We still can’t get excited about housebuilders in general, given the outlook hasn’t changed, but Barratt Redrow is at least being proactive. Changing its capital allocation strategy allows it to increase shareholder returns by buying back its own undervalued equity. We wonder if others will follow its example.
Read the press release here: https://www.barrattredrow.co.uk/investors
