Dividend stocks form the core part of my portfolio. And Persimmon (LSE:PSN) is one of them. The stock has been in my portfolio for a while, and this year I received some fairly sizeable dividend payments.
Right now, if I were to check the Persimmon dividend yield, it would say almost 18%. That’s the largest yield on the FTSE 100. However, large dividends like this are rarely sustainable.
So let’s explore what’s happening with Persimmon and why I’m not trusting this huge yield.
Bad news
In its November update, Persimmon announced that “ordinary dividends will be set at a level that is well covered by post-tax profits”. But what does this mean?
Jefferies said the announcement implied a “significant step down in payments” as trading conditions for housebuilders worsen.
In September and October, the builder has seen its cancellation rate go from 21% to 28%, which it put down to the “deterioration in market conditions“.
But there was another even less welcome update. Persimmon had previously announced that its fire safety pledge — the cost of recladding homes deemed unsafe after the Grenfell disaster — would cost £75m.
As I noted in previous articles, that made Persimmon the least impacted housebuilder by the fire safety pledge. The figure was equivalent to just 10% of the company’s pre-tax profits in 2021. Other firms, including Crest Nicholson had announced their pledge costs would be equal to a year of pre-tax profits.
I had seen this relatively low fire safety pledge cost as a reason to buy Persimmon over other housebuilders.
However, the company is now saying the cost of cladding remediation on its buildings has leapt to £350m — quadruple the £75m it had told investors it would cost in its half-year results.
What next for the dividend?
Persimmon hasn’t actually announced what its new dividend policy will mean for investors. Chris Millington of Numis has predicted that the dividend could “almost half“. However, even before the announcement, it seems highly likely that Persimmon would have to cut its dividend.
Looking at the dividend coverage ratio — a financial metric that measures the number of times that a company can pay dividends to its shareholders — in recent years, we can see that Persimmon’s coverage has not been healthy.
| Year | Coverage ratio |
| 2021 | 1.06 |
| 2020 | 0.94 |
| 2019 | No dividends |
| 2018 | 1.21 |
A ratio close to two would be considered healthy. A ratio of one indicates just enough income to pay its stated dividend.
Now, with a worsening trading environment, and a £275m additional spend on cladding, it’s clear that the dividend needs to be cut. However, it’s worth noting that even half the current dividend yield is still more than double the index average.
The question is, would I buy this stock now for a possible 9% yield? I’m tempted, but I’m concerned about more surprises after the increase in the cost of the fire safety pledge. I’ll wait for further announcements before making my mind up.
I’d also be more inclined to buy shares in other housebuilders. For example, Barratt Developments offers a 9% yield and has much stronger dividend coverage (2021: 2.25, 2020: 2.50).
