A High Yield Builder Joins The Portfolio

Stephen Bland adds Persimmon to his fourth High Yield Portfolio.

It's the first article for July and housebuilder Persimmon (LSE: PSN) is the latest selection for my fourth High Yield Portfolio. Price weakness over the last six months has driven the yield up by a sufficient margin to make it the next share on the descending FTSE 100 forecast yield rankings in a new sector which I deem suitable on the fundamentals to hold in this portfolio.

As a matter of interest another share in a new sector, yellow pages publisher Yell Group (LSE: YELL) , is very slightly above Persimmon on forecast yield so at first I chose it. However closer investigation revealed that it has a monstrous level of debt so I ruled it out subsequently.

I mention this to demonstrate that my selection process is not entirely mechanical, though the initial selection is largely so. But I then consider matters like debt, a history and short term forecast of eps, along with dividend growth etc which sometimes then disqualifies a share.

Persimmon has a good history of increasing dividends. For the year to 31/12/06 it paid out 46.5p and this is forecast at 47.05p for 07 and 56.5p for 08.

On my buying price including costs of about 1,192p, the historical yield is 3.90% and the 07 forecast is about 3.95%. For 08 we're looking at 4.74% but that's too far away really to be meaningful so don't read too much into it. Whichever figure you take, with the FTSE 100 yield at a little under 3% right now, this is definitely a high yielding share and that's what this strategy is about.

I expect that the reason for the nasty price fall in 07 is due to the market anticipating a slowdown in new house sales, assisted by the rising interest rates we've seen in the period. But has the fall in Persimmon's share price been overdone? I dunno and I dunwannano either. Like all HYP shares this is intended to be held very long term and my doctrine of Strategic Ignorance tells me to abstain from making any judgements over such a period about the economy, the sector or the share.

Returning to the fundies, Persimmon has debt but it is modest, or at least was at 31/12/06, the last balance sheet date. Eps is forecast at about 150p for 07 which compares with about 138p for 06, putting the company on a forward P/E of about 7.9. That is very low but the reason for it is almost certainly the same as above, the market fearing a fall in eps at some point in the not too distant future if house sales collapse. Fear is our friend with HYP selection because of the high yield which results from it.

Here's HYP4 to date:

Of the shares shown Stephen holds BAT, BP, BT, DSGI, Lloyds, Royal Bank of Scotland, United Utilities