Profits drop at Persimmon. Is that big dividend yield at risk?

Persimmon plc (LON:PSN) is a favourite with income hunters. But are dividends now looking vulnerable?

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FTSE 100 housebuilder Persimmon (LSE: PSN) has been a great source of dividends for income seekers in recent years. Nevertheless, the yield now sits at 8.1% following today’s poorly received set of full-year results.

Since sky-high dividends are often regarded as a red flag, should those holding the stock be worried?

Profits down

Let’s take a look at numbers first. Despite stating that financial trading performance remained “strong“, it’s not hard to see why some headed for the exits today. 

Persimmon shifted 4% fewer homes last year (15,855) than in 2018, even though the average selling price barely moved. This caused total revenue to decline by 2.4% to £3.65bn. Profit before tax fell by a little under 5% to £1.04bn.

While still very high, it’s worth noting that the York-based firm’s return on average capital employed — something that popular fund managers like Terry Smith focus on when screening for potential investments — also slipped from 41.3% to 37%. 

And the dividends? Persimmon announced a final payout of 110p per share this morning, bringing the total cash return for 2019 to 235p per share. It also made clear its intention to return the same amount in the current financial year. This is less than the consensus 246p per share expected by analysts. For me, this lack of dividend growth needs watching. 

So, the dividend’s at risk?

Hard to say. On the one hand, Boris Johnson’s victory in the general election back in December appears to have rejuvenated the housing market. If we assume that confidence continues to return to the market (quite an assumption), 2019’s figures may simply represent a blip.

The company is certainly keen to stress that its outlook remains positive.  As well as having forward sales of £1.98bn, Persimmon stated that it continues to acquire new land and boasts a strong cash position (£844m).

On the flip side, a slowing of global growth — not to mention the impact of the coronavirus outbreak — could lead to fears of an economic downturn that impacts all stocks, but particularly those in cyclical sectors.

Factor-in recent negative publicity surrounding excessive executive pay, questions over the quality of the homes and concerns over the planned abolition of the Help to Buy scheme (from which it has hugely benefitted) and I remain cautious.

The resignation of CEO David Jenkinson (announced today) creates additional uncertainty. Although he will remain for “as long as the business requires“, the fact that Mr Jenkinson has only been in post for a little over a year doesn’t scream confidence.

Aside from all this, the extent to which Persimmon’s profits are able to cover its cash payouts is nowhere near the traditional 2.0 times desired by investors. This suggests to me that any hint of a sustained dip in trading and management could quickly revise its policy on dividends. One must recall that these were cut completely in the aftermath of the financial crisis.  

Of course, it might be argued that all this is reflected in Persimmon’s valuation. Right now, the company is trading on around 11 times earnings. Given the aforementioned cyclicality of housebuilding, however, I’d say anything more than this and prospective investors were at risk of overpaying. 

In sum, the huge yield may look tempting, but I’d encourage anyone contemplating buying the stock to check they were suitably diversified elsewhere beforehand.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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