Growth stocks are shares in companies that increase their earnings faster than the average for their industry or the wider market. An income stock pays regular and predictable dividends.
I wonder if Persimmon (LSE:PSN) has the potential to be both.
Doom and gloom
The housing market has been in the doldrums for two years now. Rising interest rates have made mortgages increasingly unaffordable. And the cost-of-living crisis has meant first-time buyers are finding it harder to save for a deposit.
The result is a fall in mortgage approvals and a decline in new house sales.
On 7 November 2023, Persimmon released a trading update confirming that it expects to complete 37% fewer homes this year, compared to its five-year average.
The table below shows that the slump has affected the FTSE 250 housebuilder more than its nearest rivals.
| Company | Average completions (last 5 financial years) | Expected completions (current financial year) | % reduction |
| Barratt Developments | 16,563 | 13,750 | 17 |
| Taylor Wimpey | 13,781 | 10,250 | 26 |
| Persimmon | 15,060 | 9,500 | 37 |
Not surprisingly, the company’s share price has crashed 64% since its post-pandemic high of April 2021.
Reasons to be cheerful
However, I think we could soon see a rebound in the housing market.
There appears to be a growing consensus that UK interest rates have peaked. And inflation is starting to fall.
The company has seen a “strong pick up” in its sales rate since the start of October 2023.
And despite the uncertain economic backdrop, it managed to increase its average selling price by 2% during the third quarter of 2023, compared to the same period in 2022.
It seems to me that the green shoots of a recovery are in sight.
Future prospects
And because Persimmon has experienced more of a downturn than its rivals, I believe there’s a strong possibility that it will outperform the others — assuming, of course, the market does grow again.
If it can get back to building (say) 15,000 homes a year, generating an average pre-tax profit per house of £60k (its 2018-2022 average was £66k), it could generate around £675m in post-tax earnings.
The five-year average price-to-earnings ratio for the sector is 10. Its market cap would then be £6.75bn — 84% higher than it is now.
I think it could take three years for the sector to fully recover. But a compound annual growth rate of 21% in the company’s share price — between 2024 and 2026 — is likely to beat the wider UK stock market.
If I’m right, Persimmon meets the definition of a growth stock.
Shareholder returns
Like most housebuilders, the company has a reputation for paying generous dividends.
As recently as its 2021 financial year, it was 235p a share. But as the housing market declined, it had to preserve cash, and reduced its payout significantly.
In August 2023, the board said its intention was “to maintain the 2022 dividend of 60p per share, with a view to growing this over time“.
The company has historically returned 80%-90% of its earnings to shareholders.
If my growth predictions are correct, this could mean cash of at least £540k available for dividends by 2026. That would equate to 170p a share, giving a current yield of nearly 15%.
And as long as the housing market remains buoyant I see no reason why this couldn’t be sustained over an extended period, thereby meeting the definition of an income stock.
As a shareholder, I hope my optimism about a recovery in the housing market is justified.
