I snapped up top dividend-paying UK stock Persimmon (LSE: PSN) last October and for a while I felt very pleased with myself.
The FTSE 100 housebuilder was offering the highest yield on the index at almost 20% a year, although I wasn’t fooled by that. The shareholder payout was no longer sustainable. I knew it. Investors knew it, too.
Housebuilder on shaky ground
So when the board announced soon afterwards that the dividend would be pared back, the Persimmon share price didn’t crash as some might expect. But now I’m hurting after the dismal market reaction to today’s results.
Persimmon “delivered a very strong performance in 2022”, according to CEO Dean Finch. Total group revenues rose 6% to £3.8bn, with completions up 2% to 14,868. Average selling prices climbed 5% to £248,000, but everyone knows that revenues, completions and sales are all heading south in the year ahead.
The company has been cutting costs to mitigate build cost inflation, but it can’t buck a falling housing market, no matter how hard it struggles.
Persimmon’s shares are down 9.78% today as I write this, and they’re still sliding. Investors knew the dividend would be cut, but by 74%? That hurts. The board had little choice, with net cash falling from £1.2bn to £851m as inventories increased, while free cash flow more than halved from £765m to £373m.
Today’s Nationwide house price index showed a drop of 1.1% in February, the biggest annual fall since November 2012. UK property prices are now down 3.7% since their peak in August.
If current sales rates persist, full-year completions may slump by more than 40%. Persimmon has just posted underlying operating profits of £1bn, up from £966.7m. It won’t do that next year.
A buying opportunity, but not yet
I’m neither surprised nor dismayed. We all knew what was coming. I don’t regret buying Persimmon, my personal holding is still up 14.25%, despite today’s fall. I certainly won’t sell, I buy and hold stocks for the long term. But should I take advantage of today’s sell-off and buy more?
I’m sorely tempted, even though I expect house prices to fall a fair bit more this year. Broker predictions range from a drop of 7% (Lloyds) to 15% (Nomura). I’ve even seen talk of a 20% drop. In that scenario, the Persimmon share price woes could get worse before they get better.
I think the long-term outlook for the UK property market is still positive. We have a massive housing shortfall. The spike in mortgage rates after former Chancellor Kwasi Kwarteng’s mini-budget fiasco last year has now reversed. At some point, interest rates will peak and fall, and buyer sentiment will improve. Despite that, I won’t buy more Persimmon shares today.
Thanks to October’s purchase, I now have enough exposure to the housing market. Today’s dip isn’t big enough to make me want to fill my boots, even with a valuation of just 5.9 times earnings. I’ll keep a close eye on Persimmon’s progress. If things get really, really bad, then I’ll make my move.
