Housebuilders suffered a year to forget in 2022. And FTSE 100 stock Persimmon (LSE: PSN) was one of the biggest plungers in the index.
But the cyclicality that characterises the sector means there’s much potential for Persimmon to stage a dramatic come-back in the months and years ahead. And I’m tempted to buy it now with the goal of doubling my money on the shares over time.
A chunky dividend
Right now, I don’t have spare funds to invest. But I’d take comfort from the firm’s chunky shareholder dividends if I did. And I’d hold the stock while waiting for a recovery in the share price.
However, the dividend could face a haircut at some point because of declining earnings in the business. But, crucially, my guess is the shareholder payment may not disappear completely, thus leaving a still-generous yield. However, there’s always the potential for me to be wrong in my assumptions.
Nevertheless, to my reading of the situation, the current slow-down in the property market is mild. And many knowledgeable commentators have been predicting that house prices will fall by around 8-10% this year. If that proves to be the case, the correction in the market will be much shallower than the deep swings I remember from the 1980s and 1990s.
No one knows for sure what will happen to prices in the property market. But there’s an ongoing supply and demand imbalance underpinning the asset class. In other words, more people want to buy houses than there are houses to buy.
And that underlying fundamental factor worked with some other temporary circumstances to accelerate the rise in house prices during the pandemic. So if a 10% correction for property prices is on the cards, it could be a healthy situation. Indeed, some of the froth will likely be blown from racy real estate valuations.
Persimmon may rebuild its earnings
However, a minor retreat in house prices will likely be insufficient to plunge Persimmon back into loss-making territory. And, over time, I’d expect the company to rebuild its earnings because of the healthy fundamentals of the sector.
And that’s why I’ve set my goal at a 100% capital return from the shares, starting from the share price being near 1,400p, as I write. After all, in May 2021, it was around 3,200p. If it returns to those levels, I’ll have achieved my goal with dividends on top.
The stock’s plunge has been rapid. A year ago, the price stood as high as about 2,770p. And the move lower has been driven by predictions that earnings look set to decline by around 40% this year.
On 12 January, the company said in a trading update that it saw weaker customer demand in the second half of the year. And that was because of “concerns over the economy, mortgage rates and the cost of living”.
However, the directors also said “the longer-term demand outlook for new homes remains favourable”.
It’s possible for Persimmon’s business to decline further and to take the share price lower. Even the dividend could become a casualty if the economic downturn in the sector gains traction. However, I’d be inclined to embrace the risks by buying some of the shares with an eye on the long-term potential of the stock and the business.
