If I’d invested £10,000 in Persimmon shares 5 years ago, here’s how much passive income I’d have now!

Persimmon shares have fallen by 56% over the past five years. And the dividend has recently been cut. Is this a buying opportunity?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Passive income text with pin graph chart on business table

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If I’d invested £10,000 in Persimmon (LSE:PSN) shares in June 2018, my shareholding would now be worth £4,400.

To make matters worse, the housebuilder — which has a reputation for returning nearly all of its profits to shareholders — has recently cut its dividend.

In respect of the 2021 financial year, shareholders received 235p for each share held. For 2023, the directors are hoping to “at least” maintain last year’s 60p a share “with a view to growing this over time“.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

My hypothetical investment five years ago, would have bought me 388 shares. Since 2018, I’d have received a very healthy passive income of £3,822.

But if I had reinvested the dividends at the end of each year, I’d now have an additional 211 shares. And my five-year income would have been £4,510.

Also, the extra stock would narrow my paper losses to £3,369.

DateDividend paid per share (pence)
2 July 2018110
29 March 2019125
2 July 2019110
14 September 202040
14 December 202070
26 March 2021125
13 August 2021110
1 April 2022125
8 July 2022110
5 May 202360
Source: Persimmon

Looking forward

But that’s all history. Is the stock worth buying now?

Even with the dividend cut, the collapse in the share price means the shares are yielding around 5.5%. This is above the FTSE 100 average.

But with stubborn inflation affecting living standards, and rising interest rates increasing the cost of mortgages, the company is expecting to build far fewer homes this year. In its most recent trading update, it said completions would be at the “top end” of 8,000-9,000.

The last time Persimmon built so few homes was in 2009, when it sold 8,976 properties. That year it didn’t pay a dividend and reported a profit before tax of just £78m.

However, I expect things to be better this year.

YearUnit salesEarnings per share (pence)Underlying profit before tax (£m)
201816,449286.31,100
201915,855269.11,048
202013,575220.7863
202114,551248.7973
202214,868247.31,012
Source: Persimmon

Number crunching

In 2022, the company made a gross profit per house of £76,843. Assuming 9,000 completions and overheads of £150m, pre-tax earnings should be around £545m for 2023. Even with a 10% reduction in the margin — to reflect a fall in the average selling price and/or cost increases due to inflation — the company should make over £300m (94p a share).

A dividend of 60p requires cash of £192m. Even at the bottom end of profit expectations, this is a lot lower than earnings. In 2021, the company returned 95% of its profits to shareholders.

I therefore remain hopeful that the dividend might be closer to 75p this year. If correct, this implies a yield of 6.8%.

One of the reasons why the company is able to pay out such a high proportion of its profits, is because it’s debt free. That’s quite an achievement for a business that’s exposed to a cyclical housing market and must buy land to ensure it can meet future demand.

But my investment case assumes there will be no further shocks to the UK housing market. This isn’t guaranteed given that the Bank of England is expected to increase interest rates further.

What should I do?

I already own shares in Persimmon. But I don’t have any spare cash to buy any more.

Even thought its been a tough couple of years, I don’t intend selling my shares. There’s a chronic shortage of housing in the country that needs to be addressed. Over the long term, once the company resumes building 14,000-16,000 properties a year, I’m confident that the shares will return to their 2021 levels.

Until then, I will be content earning an above-average level of passive income.

British CEO gobbles up £238,000 of own stock

What company does he run?

And why is he so confident in its long-term potential?

This new report - ‘One Top Growth Stock from The Motley Fool’ - reveals the full details, both risks and opportunities. Some of which you may find frankly, unbelievable.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent:

  • Double-digit revenue growth
  • Returns on capital almost 600% the UK average
  • Now, profits are exploding again - up 46% in 1 year!

It’s no wonder insiders are buying this stock hand over fist. Last year, they bought a total £492,000 of shares. And now might be the ideal moment to join them.

So please, don’t miss this report, ‘One Top Growth Stock from The Motley Fool’ Including both risks and opportunities.

Secure your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Persimmon Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Dividend investors! Here’s what Warren Buffett says builds wealth in the stock market

Reinvesting dividends at yields of 8% or higher looks like a good way of building wealth. But Warren Buffett has…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s my Stocks and Shares ISA plan for 2025-26

A Stocks and Shares ISA helps investors avoid taxes on dividends and capital gains. And Stephen Wright has a plan…

Read more »

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

Could Tesla’s share price jump over the next 12 months? These analysts think so!

Tesla's share price has fallen by almost a third since 1 January. But optimism is high that Elon Musk's company…

Read more »

Investing Articles

I asked ChatGPT where the FTSE 100 will be in 6 months: here’s what it said…

Let’s be realistic, ChatGPT can’t predict the future. But it did do a good job of compiling data from brokerages…

Read more »

Investing Articles

Could the Rolls-Royce share price hit £10?

The Rolls-Royce share price has taken most analysts by surprise with almost everything going right for the British engineering giant.

Read more »

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »