Could this be one of the FTSE 100’s best cheap dividend shares?

Could this be one of the FTSE 100’s best cheap dividend shares?

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The recent slowdown in homes demand has battered many housebuilders’ reputations as reliable dividend shares.

Take Barratt Developments (LSE:BDEV), for instance. The FTSE 100 builder has sliced the interim dividend for this fiscal year (to June 2024), to 4.4p per share from 10.2p previously.

As a Barratt shareholder, I can understand the company’s safety-first approach, even if it affects the passive income I receive in the near term. Revenues slumped more than a third in its first half, and net cash sank as completions plummeted.

But City analysts are expecting earnings to rebound sharply from the upcoming financial year. And as a result, dividends are tipped to leap too. Could now be the time to buy Barratt shares for a second income?

Dividend growth

Financial year Predicted dividend Annual change Dividend yield
 2024  14.9p  – 56%  3%
 2025  18.9p  + 27%  3.9%
 2026  23.3p  + 23%  4.8%

As the table above shows, dividends are expected to fall by more than half in the soon-to-be-finished financial year.

However, the Square Mile’s abacus bashers think annual rewards will rise by around a quarter year on year in the next two financial years. This means the dividend yield on Barratt shares once again beats the FTSE 100’s forward yield of 3.5% by a decent distance.

It’s perhaps no surprise that brokers are so optimistic. Homes demand is stabilising as lending conditions become kinder to buyers. Barratt has said in February that “we have seen early signs of improvement in both reservation rates and buyer sentiment, helped by expectations of lower interest rates and the introduction of more competitive mortgage rates.”

Cheap as chips

Of course there’s no guarantee that Barratt will maintain this rebound. The economic outlook remains gloomy and rising unemployment creates some danger.

But with inflation falling, analysts expect the Bank of England to enact several interest cuts over the next year to resuscitate the homes market.

This is why City analysts expect earnings to spring back sharply at Barratt. The Footsie company is tipped to record profits growth of 22% and 23% for financial 2024 and 2025, respectively.

Pleasingly, these forecasts mean that the builder also looks cheap from an earnings perspective. Right now it trades on a forward price-to-earnings growth (PEG) ratio of 0.7 for this year.

Any reading below 1 indicates that a share is undervalued. Combined with those big dividend yields, Barratt shares look like good value to me right now.

The verdict

I think a case can be made that Barratt is one of the Footsie’s best-value dividend shares today and it’s worth long-term investors considering it.

Demand for new-build homes is tipped to balloon over the next decade as the UK population grows. The landscape could be even more favourable for the housebuilders too if Labour wins next month’s general election.

The opposition party has vowed to build 1.5m new homes over the next five years, driven by an overhaul of planning rules. Barratt’s £2.5bn mega-merger with rival Redrow would give it even more firepower to exploit this favourable environment too.

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