Regular readers will know of my unbridled enthusiasm for the country’s homebuilders.
I myself bought into the sector a few years back, and since then the outlook has worsened considerably. House price growth has decelerated considerably and reflects the worries over Brexit that is causing existing homeowners to stick where they are and not trade up. It also shows how legislative changes concerning tax breaks have smashed demand for buy-to-let purposes.
Barring a complete meltdown in the British economy it’s hard to see how conditions could become much more difficult for the sector. And yet these businesses still have plenty of scope to deliver exceptional shareholder returns.
Profits to keep rising
Let’s look at Persimmon (LSE: PSN). City analysts are expecting earnings expansion to cool from the double-digit-percentage earnings of the past several years to rises of 7% and 3% for 2018 and 2019 respectively.
Clearly the profits picture for the likes of Persimmon is no longer sexy. But the trading environment remains buoyant enough for the bottom line to keep on improving, and thus dividends remain at generous levels.
The stability of the British homes market was illustrated again in latest numbers from the Nationwide. Despite the impact caused by a serious deterioration in the London housing sector, prices across the country continue to rise. According to the building society the value of the average British home climbed 2% higher year-on-year in September, to £214,922.
Yields in excess of 10%!
Now let’s take a look at those dividends. Through to the close of next year Persimmon is anticipated to pay annual dividends of 235p per share, figures that yield a terrific 10.1%.
This smashes the average FTSE 100 yield that sits close to 3.5%. And it certainly smashes the paltry interest rates on offer across the country’s cash ISAs. A scan of Moneysupermarket.com shows that the best yield on offer remains at 1.25% and is offered by Paragon Bank.
As I said, Persimmon and its peers aren’t without their share of risk as economic conditions in Britain remain soft and difficult to predict. But I would argue that the troubles facing the sector are reflected in a forward P/E ratio of 8.4 times.
Investing in these firms is certainly preferable to sticking one’s money in one of those cash ISAs, accounts that are guaranteed to lose savers money at the current time. Inflation in the UK is currently running at twice the level of the best-paying cash ISA, meaning that the value of your money is eroding at an alarming rate. And investors are losing out on some of the brilliant returns available by buying into some of the Footsie’s exceptional blue-chips.
There’s always a place for cash accounts, but they should only really ever be used to store emergency capital in the event of a rainy day. For those looking to retire with some wealth under their belts, investors need to stash the cash in bright blue-chip companies in my opinion. And Persimmon is one of the best.
