Having fallen by more than half since November 2020, the Persimmon (LSE:PSN) share price is the worst performer in my Stocks and Shares ISA.
I first bought the FTSE 100 housebuilder just before the pandemic and was primarily attracted by the stock’s generous dividend. At the time, it was paying 235p a share. Nowadays, things are very different.
After a slowdown in the housing market and a period of sustained post-Covid supply-chain inflation, Persimmon’s earnings in 2024 were around half their five-year average. As a result, the group’s had to cut its dividend by 75%. This is a valuable reminder that payouts cannot be guaranteed.
However, this disciplined approach to returning cash to shareholders has helped ensure that its balance sheet remains healthy. At 30 June, the group had no debt, which is unusual for one of the UK’s largest listed businesses.
‘Expert’ opinion
Encouragingly, a look at the latest forecast of analysts suggests that I could recover some of my losses over the next 12 months. That’s because the consensus is for a 24% capital gain. This is based on an average price target of 1,500p.
Okay, even if this proves to be correct, it’s a long way shy of its pre-pandemic level. But that’s my problem — it could be a different story for those wanting to take a stake now. If the brokers are right, when combined with the group’s current dividend of 60p, the total return could be as high as 29%. And I’m sure most investors would be happy with that.
However, the UK housing market is cyclical and while it appears to have turned the corner — mortgage approvals are slowly increasing — a recovery is far from certain.
All eyes on the Budget
And in my opinion, the Autumn Budget at the end of November is critical in determining the direction of Persimmon’s share price over the next year or so. Depending on the Chancellor’s choices — and how her speech is received by bond investors – the housing market could go one of two ways.
If Rachel Reeves breaks her own fiscal rules, gilt rates could surge. Mortgages would then become more expensive and demand for new houses would fall. But even if the markets welcome her prudence, there’s a risk that the anticipated tax increases could damage consumer confidence and squeeze incomes further. All housebuilders would then suffer.
Alternatively, raising the stamp duty threshold — or introducing other incentives for first-time buyers — could help a new generation of buyers get on the housing ladder. In these circumstances, Persimmon could be one of the beneficiaries. The reason being its properties tend to be priced at the cheaper end of the market.
However, irrespective of what happens on 26 November, there’s still going to be a housing shortage in the country. The government wants to address this by streamlining the planning process. And it sees housebuilding as a key element of its economic growth strategy.
On this basis, Persimmon could be a stock for patient investors to consider. But even if the housing market recovery stalls, there’s always the group’s dividend to be thankful for. And savvy investors know that using this income stream to buy more of the group’s shares at their current historically low level could be a winning long-term strategy.
