The Persimmon (LSE:PSN) share price is currently 60% lower than it was during the summer of 2021.
And to my surprise, the shares are now trading for 20% less than they were in April 2020, when building sites across the country were closed due to Covid-19.
When the stock was last at £30, the base rate was 0.1%, the company’s dividend was 235p, and the run rate for mortgage approvals was over 200k a quarter.
Will these good times return soon?
| Period | UK house completions | UK mortgage approvals | Persimmon share price (£) | Base rate (%) |
| Q1 2020 | 34,940 | 190,684 | 19.17 | 0.10 |
| Q2 2020 | 16,880 | 60,780 | 22.86 | 0.10 |
| Q3 2020 | 36,800 | 229,314 | 24.73 | 0.10 |
| Q4 2020 | 43,260 | 295,958 | 27.67 | 0.10 |
| Q1 2021 | 47,190 | 249,011 | 29.40 | 0.10 |
| Q2 2021 | 44,930 | 227,396 | 29.59 | 0.10 |
| Q3 2021 | 43,290 | 199,400 | 26.68 | 0.10 |
| Q4 2021 | 42,410 | 201,213 | 28.56 | 0.25 |
| Q1 2022 | 42,850 | 205,883 | 21.51 | 0.75 |
| Q2 2022 | 52,040 | 181,091 | 18.63 | 1.25 |
| Q3 2022 | 43,140 | 189,189 | 12.38 | 2.25 |
| Q4 2022 | 39,220 | 141,106 | 12.17 | 3.50 |
| Q1 2023 | Not available | 81,135* | 12.56 | 4.25 |
Interesting
To try and tame inflation, the Bank of England (BoE) has increased interest rates 11 times in 17 months. This has affected disposable incomes and confidence in the housing market, with mortgage approvals currently half what they were in the last quarter of 2020.
The International Monetary Fund recently predicted that interest rates will fall to pre-pandemic levels once inflation is sustainably lower. The BoE expects inflation to be back below its 2% target by early 2024.
If correct, history tells me that consumer confidence will then return and people will want to buy houses once more.
Reaping dividends
Persimmon shareholders have enjoyed some generous returns in recent times.
When the company’s share price was last above £30, the annual dividend was 235p, giving a yield close to 8%.
Earlier this year, given the uncertain economic outlook, the payout was cut to 60p. The shares are now yielding around half what they were in 2021. But they are still above the FTSE 100 average.
Last week, the directors announced that they are expecting to sell (complete) around 9k homes in 2023. Assuming an average pre-tax profit of £65k per house, this would give earnings this year of £585m.
Based on the current number of shares in issue, a 60p dividend will cost £192m.
Persimmon has a reputation for returning a large proportion of its profits to shareholders. For example, in 2020 its dividend was equivalent to 96% of pre-tax earnings. This makes me think that the directors are being cautious. I wouldn’t be surprised to see a hike in the dividend to around £1 a share.
But we are a long way from seeing a payout of 235p, which would cost around £750m.
| Financial year | Revenue (£m) | Underlying profit before tax (£m) | Completions | Pre-tax profit per completion (£) |
| 2018 | 3,738 | 1,091 | 16,449 | 66,314 |
| 2019 | 3,649 | 1,048 | 15,855 | 66,105 |
| 2020 | 3,328 | 863 | 13,575 | 63,580 |
| 2021 | 3,611 | 967 | 14,551 | 66,442 |
| 2022 | 3,816 | 1,007 | 14,868 | 67,696 |
The good times are coming again
I see no reason why Persimmon shares will not reach £30 again. But it may take a few years.
I believe the company will want to be building at least 14,000 houses a year before the dividend is restored to 2020 levels. And this probably won’t happen until 2025 at the earliest.
I expect an increase in completions from current levels will be driven by lower interest rates on the back of falling inflation. And with an election due before January 2025, all political parties will be looking to attract voters. I’m sure promises will be forthcoming of new schemes to help first-time buyers to get on the housing ladder. This should also help reignite the market.
I already own shares in Persimmon. But if I didn’t, I’d be happy to have the stock in my portfolio.
