Persimmon’s (LSE:PSN) share price remains on the back foot as worries over the UK housing market mount. But at current levels of £10.35, the business does — at face value — look like it could be a great buy for passive income.
Right now, the FTSE 100 company carries an enormous 5.8% dividend yield for 2023. This comfortably beats the forward average of 3.8% that UK blue-chip shares currently carry.
That said, investors can get higher yields on other British housebuilding shares. As the table below shows, Persimmon offers better yields that Vistry Group and Barratt Developments. But they fall short of what Taylor Wimpey and Redrow currently offer.
|Stock||Forward Dividend Yield|
So should I buy the builder’s shares to supercharge my share-based second income?
Dividends keep coming
Buying any of London’s listed housebuilders is a risk right now. Profits are coming under severe pressure as interest rates rise and the UK economy cools.
Completions are falling as a result, while build costs are still running at elevated levels, putting margins under considerable pressure.
This is already taking a toll on the dividends Persimmon shares are delivering. In 2022, the company cut the full-year payout to 60p per share from 235p in the previous two years.
Encouragingly however, the business remains committed to delivering dividends for its shareholders. In its half-year statement it declared an interim payment of 20p, and said it intended to match last year’s total dividend.
City analysts are expecting the FTSE firm to make good on this pledge. But there are several good reasons why current dividend forecasts look quite fragile.
Firstly, conditions in Britain’s housing market remain highly challenging. Persimmon entered the second half of 2023 with forward sales of £1.4bn, down 27% year on year. And private average selling prices in the forward order book were also up just 0.6%.
Since then demand for homes seems to have taken a significant turn for the worse. Nationwide and Halifax note that average property prices have slumped at their sharpest rate since the late 2000s in August.
Mortgage approvals also dropped to five-month lows in July, the Bank of England has said. Home loan demand is likely to remain weak too as interest rates keep rising, possibly well into 2024.
This is especially concerning given the level of dividend cover at Persimmon. This year’s predicted shareholder payout is covered just 1.4 times by expected earnings of 81p. Any reading below 2 times poses danger at the best of times, and especially in the current climate.
Meanwhile, the company’s cash reserves are dwindling as sales of its newbuilds dry up. Cash on the balance sheet more than halved to £360m as of June.
Given all of the above, I think there are better stocks to buy for investors seeking near-term passive income.
I plan to hold onto my Persimmon shares. This is because I believe the long-term outlook for the UK housing sector remains pretty strong. But I won’t be buying more of them in the current economic climate.