Dividend yields are not terribly reliable measures these days. Recent stock market uncertainty has artificially pumped them up, like in the case of the FTSE 100 Russian miner Evraz. It had the biggest dividend yield among all the index’s constituent stocks even earlier, but now its price has plunged so much that its yield is at an explosive 100%+. Needless to say, it is still not attractive considering the risks attached to buying the stock. But not all stocks can be painted with the same brush. Like this FTSE 100 stock with a 10%+ dividend yield.
Over-correction in the Persimmon share price
I am talking about the housebuilder Persimmon (LSE: PSN). In my book, it is an undervalued stock right now. Its share price has actually declined by 14% over the past year. Some of this was to be expected. The real estate market benefited significantly from government support during the pandemic. Most significantly, stamp duty relief led to a housing market rally, that supported housebuilders’ fortunes in otherwise challenging times. But as the stimulus was withdrawn, their share prices came off.
I do believe, however, that the Persimmon share price has over-corrected. At present, it is trading 30% below its pre-pandemic highs, which suggests that it could rise far more from here. This is especially so considering the company’s recent results. For the full year 2021, the company saw an increase in both net profits and revenues from 2020. It has also managed to reverse the decline seen under both headings since 2019, which is particularly encouraging from a dividend perspective. As a shareholder, it is hard for me to see how it can sustain its dividends if its income falls. Now I am less concerned.
Promising dividend yield
In its results released earlier today, the company reported it expects to maintain its dividends at the 2021 levels, at least so far. This puts both its current and forward yield at just north of 10%. Little wonder then, that its share price has jumped 4.3% this Wednesday afternoon. I do believe, though that it can rise much more. This is partly because, as I mentioned earlier, it is trading below pre-pandemic levels. But it is also because its market valuation looks subdued to me, with its price-to-earnings (P/E) ratio at around 9.5 times. This is much lower than the FTSE 100 P/E of 15 times.
Would I buy the FTSE 100 stock?
Persimmon’s valuation is in line with other real estate stocks, which suggests to me that it may not be undervalued compared to peers. At the same time, at this uncertain time for stock markets, cyclicals like property stocks are expected to take a bit of a hit. If economic recovery does continue, however, Persimmon’s fortunes are likely to continue improving as far as I can see. Moreover, even keeping peer valuations in mind, the fact is that its P/E is lower than it was even a few months ago. I think it is a good time for me to increase my holdings in the stock.