I continue to believe the nation’s homebuilders offer brilliant investment potential for share pickers like me. It’s why I own FTSE 100 shares Barratt Developments and Taylor Wimpey in my Stocks and Shares ISA. I’d happily add Persimmon (LSE: PSN) to my shares portfolio as well.
Homebuyer demand is beginning to moderate as the Stamp Duty holiday’s gradually withdrawn. This has raised fears of a sharp fall in home prices and consequently concerns that builders’s margins, already hit by rising building product and labour costs, could take an almighty whack as buyer appetite wanes. Home sales in the UK tumbled 62% month-on-month to 82,110 in July as Stamp Duty rates started returning to normal.
Happily for Persimmon and its peers however, I still expect demand for newbuild properties to continue outstripping supply for a number of reasons. Interest rates are likely to remain ultra-low to aid the economic recovery, thus keeping housing costs affordable for buyers.
Government support for first-time buyers through Help to Buy ISAs and equity loans remains in place. And an increasingly bloody rate war being fought out by lenders is helping people get their foot on the ladder as well.
Another top FTSE 100 builder
The long-term outlook for UK shares like Persimmon remains ultra bright, in my opinion. And this FTSE 100 operator is investing heavily in its land bank to ramp up build rates to make the most of this phenomenon. It added 10,000 acres to its holdings in the first half of 2021 alone. This takes the total to a shade below 86,000 acres.
Besides, I think Persimmon could be a good buy on account of its industry-beating margins. The company’s new housing operating margin came in at a splendid 27.6% between January and June (up a full percentage point from a year earlier). By comparison, Taylor Wimpey’s operating profit margin was 19.3% for the first half, and Bellway’s underlying operating margin was further behind, at 17% for the financial year to July.
Persimmon has proved so far that it can effectively wrestle with the problem of rising raw material costs. Those huge margins suggest that the FTSE 100 share could continue to deliver impressive bottom-line growth, even if the broader housing market cools down too.
8.2% dividend yields!
Robust trading conditions has helped housebuilder share prices rise strongly over the past year. Persimmon alone has gained 7% in value since this time last August. Yet many of these UK shares continue to offer terrific value for money.
City analysts think Persimmon will record a 14% annual earnings improvement in 2021. Therefore, it trades on a forward price-to-earnings growth (PEG) ratio of 0.8. Sitting below the value benchmark of 1, this suggests the company is significantly undervalued by the market.
What’s more, expectations that Persimmon will lift the yearly dividend to 235p per share, from 110p in 2020, means the builder sports a monster 8.2% dividend yield. I think its a top buy despite the cyclical nature of its operations that means it could suffer if broader economic conditions deteriorate.
