There’s a lot to like in today’s full-year report from housebuilding company Persimmon (LSE: PSN). Of course, the pandemic dented profits a bit in 2020. But I find some of the other figures to be encouraging. And judging by this morning’s buoyant share price action, other investors agree.
Why I’d buy this FTSE 100 high-yielding stock
The lockdown restrictions contributed to a decline of just over 14% in new home completions. And that led to a fall in total revenue of almost 9% compared to 2019. But Persimmon still managed to complete 13,575 new homes in 2020, which strikes me as a worthwhile contribution to the UK’s housing stock.
Meanwhile, in 2020 we saw a robust housing market. And the company’s selling prices rose by nearly 7%. The average new Persimmon house sold for £230,534. And I’ve been amazed at how well my own property has appreciated in the almost six years I’ve owned it. Perhaps the lesson is how important it is for investors to focus on asset diversification. I’ve got a decent split between property and shares, for example. And the approach has served me well.
Beneath the challenges of the pandemic, the long-term supply and demand characteristics of the UK housing market are good for housebuilders. And the government seems committed to supporting the market on an ongoing basis. Those tailwinds have powered Persimmon’s business for some time, and they show up in today’s results as well.
For example, forward sales rose by almost 15% in 2020 to £2.27bn. And the company’s cash balance shot up by just over 46% during the year. On 31 December, the figure for net cash on the balance sheet stood at just over £1,234m. And Persimmon has negligible borrowings.
Robust finances
The finances are robust. But they should be. Persimmon has been trading well with bumper profits for years now. But we should never forget it’s a cyclical business. If we didn’t have the happy set of economic circumstances I’ve outlined, Persimmon could drop like a stone. It makes a great deal of sense for housebuilders to trade their metaphorical socks off while the going is good. And for them to salt away every penny for the bad times ahead when the bottom might eventually fall out of their businesses.
But Persimmon has been spinning out bumper shareholder returns for so long, it’s easy to forget the inherent risk in holding the stock. Yet those with eyebrows as long and bushy as mine will remember the company following the credit crunch in the late noughties. Back then, you could hardly find a willing person to take the pulverised shares off your hands.
However, now I reckon the company could have a long road ahead with favourable industry economics. And I’m prepared to risk owning a few of the shares in my diversified portfolio. After all, today the directors committed to more generous shareholder dividends ahead “subject to continual board review”. And one of the main features of owning the stock over the past decade or so has been those abundant shareholder cash returns.
