I’m a big believer in the FTSE 100’s housebuilders and their ability to deliver terrific shareholder returns in the years ahead. I own shares in Barratt and Taylor Wimpey on the back of their fertile trading environment, though I’d happily put Persimmon (LSE: PSN) in my personal Stocks and Shares ISA as well.
It doesn’t matter that the UK is locked in a political crisis and a period of severe economic uncertainty. Housing demand from first-time buyers remains exceptionally strong, and latest UK Finance figures illustrated this perfectly. According to the body, mortgage approvals amongst this group rose 5.8% in July to 32,640.
Sales to first-time buyers continue to rip higher thanks to a variety of factors: government support via Help to Buy; the mortgage rate war being fought out amongst Britain’s lenders; an environment of low central bank rates; and steadily-improving employment rates and wage growth. And many, if not all, of these factors look set to reign over the next several years at least.
Shocking homes shortages
However, these demand boosters aren’t the only reason to expect profits for the likes of Persimmon to keep booming. It’s not exactly a secret that Britain isn’t building enough homes thanks to confused government policy, which is exacerbating the supply/demand imbalance in the housing market. If anything, construction rates continue to get worse not better.
Indeed, the latest figures from the Ministry of Housing, Communities & Local Government show that, during the three months to June, new-build starts in England fell 9% on a quarterly and an annual basis to just 36,630 homes. This suggests that government plans to build 300,000 new homes annually by the mid-2020s need some serious surgery.
11%+ yields!
No wonder, then, that City analysts feel confident enough to predict more earnings growth at Persimmon. A 3% bottom-line increase is currently being touted for 2019, one which supports the company’s pledge of another 235p per share annual dividend. And so at current prices, buyers of this particular stock can enjoy an 11.5% forward yield.
The Footsie builder hass been whacked more recently by a combination of increased costs and, following recent questions over the quality of its homes, its decision to slow build rates to improve the customer experience. As a consequence of these issues, pre-tax profits edged 1.4% lower in the six months to June, to £509.3m.
But income investors should be encouraged by the fact that Persimmon remains a mighty cash-generating machine. Despite lower sales rates, free cash generation still impressed at £182.4m, meaning that cash on the balance sheet stood at a not-inconsiderable £832.8m as of June. This should enable it to continue paying big dividends, even if profits growth does remain more muted in the next couple of years.
In fact, given government’s proven inadequacies when it comes to soothing the housing crisis, I think investors can expect Persimmon and its peers to remain dependable earnings generators and exceptional income providers for many years to come. And I fully expect them to help me reach my own personal retirement goals.
