Weakness in the UK housing market has pulled Persimmon’s (LSE:PSN) share price 43% lower over the past 12 months. Based on current dividend forecasts the FTSE 100 builder now carries a 7.6% dividend yield for 2023.
This is more than double the FTSE index average of 3.7%. And things get even better for next year, too. For then the yield leaps to 8%.
I already own Persimmon shares in my Stocks and Shares ISA. And I’m considering adding more on account of those gigantic dividend yields. But is the housebuilder too risky as Britain’s economy slumps and interest rates rise?
Too cheap to miss?
It’s not just Persimmon’s large yields that are drawing me in. The company also trades on a rock-bottom price-to-earnings (P/E) ratio of 10 times. This is comfortably below the FTSE 100 average north of 13 times.
Bearish investors would argue that this meagre valuation reflects the high risks facing Persimmon today. The business warned last week that “higher mortgage rates, inflation, heightened market uncertainty and the end of reservations under Help to Buy” would provide challenges in 2023.
However, recent news might suggest that the slowdown might not be as bad as many suggest and that the housebuilder is actually trading too cheaply.
Latest Rightmove data showed average home prices rising 0.9% month on month in January. It also showed that the number of buyer enquiries had risen 55% in the last two weeks.
However…
Yet despite that positive Rightmove data, I still have reservations about adding to my Persimmon holdings.
I’ve prioritised buying stocks for their dividends this year. This is because receiving income could be the best way to make a strong return as the global economy struggles. In this environment achieving solid capital appreciation could be difficult.
My worry is that dividends from Persimmon might fall well short of forecast. Predicted dividends through to 2023 are covered just 1.3 times by anticipated earnings. This is well short of the desired safety margin of 2 times and above.
The company’s financial strength has waned as demand for its homes falls. It had a decent £860m worth of cash at the end of last year. But this was down significantly from more than £1.2bn at the close of 2021.
Its cash balance could continue plummeting as the housing market cools, giving it less financial headroom to pay more mega dividends.
Time to buy Persimmon shares?
Don’t get me wrong. I haven’t turned bearish on Persimmon shares and still plan to hold on to mine. I expect the UK’s housing market to remain massively undersupplied in the years to come. And so I think the firm will deliver excellent long-term returns.
But I’m not convinced that the builder will provide the sort of market-beating dividends brokers are currently predicting. I’ll be watching the housing market closely for encouragement to top up my holdings. However, for the time being I’m happy to buy other UK shares to boost my passive income this year.
