Housebuilder Persimmon (LSE: PSN) has what looks like a startling dividend yield of 19.6%. That reflects a couple of factors. The yield has moved up sharply because the Persimmon share price has crashed 56% in the past year. On top of that, the company has signalled that the dividend will likely fall. As always, historic yield is not a reliable indicator of what to expect in future.
Still, with Persimmon shares trading at less than half price compared to 12 months ago, do they offer a bargain for my portfolio? The company now trades on a price-to-earnings ratio of just five. It expects to end the year sitting on a cash pile of around £700m even after returning £750m in capital to shareholders during 2022.
Housebuilders and the housing cycle
I think the Persimmon share price crash reflects investor concern about the short- to-medium-term prospects for the housing market. This has not only affected Persimmon shares. In the past year, rivals have also seen their valuations crumble. Shares in Bellway have fallen 42%, Crest Nicholson is down 35%, Taylor Wimpey has lost 40% and Barratt is off 44%.
So while the Persimmon share price has fallen more than most, the downward trend is sectoral, rather than company-specific. Investors fear that rising interest rates and tightened consumer budgets could lead to house sales volumes falling and prices heading lower. That would hurt both revenues and profits at builders.
Falling share price
The company now expects to complete 14,500-15,000 homes this year, compared to 14,551 last year. So volumes seem to be holding up fine so far. Selling prices also seem to be holding up for now. But 2023 looks bleaker. The company has warned investors that it expects fewer completions than this year. It also foresees “a deterioration in average selling prices” hurting profit margins.
Compared to rivals, Persimmon’s coverage for its dividends (both ordinary and special) is weak. So smaller profits could lead to a lower total dividend, while at some rivals the payout may be maintained even if earnings fall. I think that helps explain why the Persimmon share price has been particularly hard hit compared to rivals.
My move
Last month, Persimmon announced a new capital allocation policy. That will likely lead to a smaller dividend in 2023 than before.
Perhaps surprisingly though, this actually makes the shares more attractive to me. It shows that management is proactively handling the possible impact of lower selling prices on the company’s dividend.
Having such a large yield means that the dividend could still be attractive even after a cut. Persimmon has consistently paid ordinary dividends and I expect that to continue if business performance allows. It is the special dividend I reckon may be cut. Indeed, the company has already indicated that next year will see no special dividend. But the ordinary dividend alone yields over 11% right now.
Persimmon has a strong brand, proven business model with high profit margins and generous dividend. I continue to see it as an attractive pick for a long-term investor like me. However, I do think the housing market could get a lot worse from here. So I am waiting to see what happens rather than buying Persimmon shares just yet.
