Persimmon (LSE:PSN) shares pay the highest dividend on the FTSE 100. Buying at today’s price, I could expect an 11.2% dividend yield. That’s huge and would certainly help my portfolio navigate inflation, which currently sits at levels not seen for decades. Persimmon, headquartered in York, is one of the top three housebuilders in the UK by revenue.
Recent performance
The firm posted a bumper year in 2021 but the share price has been dragged down by worries around inflation, interest rate rises and the cost of the cladding crisis. In its last full-year results, Persimmon reported profit pre-tax of £966m, far higher than the £783m reported in 2020. However, 2021 figures remained behind pre-pandemic levels. The 2021 surge was driven by rising house prices and increased or even pent-up demand.
A total of 14,551 new homes were completed in 2021, against 13,575 in 2020, with the average selling price improving to £237,078 from £230,534 in 2020. The firm also added over 20,750 plots of land to its development pipeline. Persimmon attributed the solid performance to “strong customer demand, good mortgage availability and low interest rates”.
Management said that 2022 had started well and forward sales were “robust” at £2.21bn.
Is the dividend sustainable?
Last year, dividends totalled £750m. That’s quite a large proportion of the company’s pre-tax profits and leaves it with a dividend coverage ratio of around one. A ratio above two would be considered healthy. Yes, the health of dividend also depends on things like cash generation. But for me, this dividend looks unsustainable unless the business improves further in 2022.
Risks
The housing sector is a hard one to predict right now. I’m bullish on the long-term prospects, but 2022 is a pretty unique environment. The market has gone from strength to strength since the pandemic, but inflation and higher interest rates could dampen house prices. This has been weighing heavily on the industry and housebuilder stocks have been on a steady downward trend despite booming sales. Another issue is the cladding crisis. The housebuilder has put aside £75m for cladding purposes, but this figure could increase further.
Collectively these factors are why Persimmon has a price-to-earnings ratio of just 8.3. That’s particularly cheap, although its worth noting that there are cheaper housebuilders out there. But these other housebuilders aren’t paying 11.2% dividend yields.
Should I buy?
I’m pretty bullish on housebuilder stocks, but at this moment in time, I’m concerned about the sustainability of the dividend yield and 2022 performance. Yes, I invest for the long run, but I want to see how inflation and interest rate rises impact the property market before I make a move on this stock. This is definitely one for my watchlist, but I’m holding out for more data before I buy.
