Is the Persimmon share price the biggest value trap in the FTSE 100?

As shares in FTSE 100 (INDEXFTSE: UKX) housebuilder Persimmon plc (LSE: PSN) begin to recover, this Fool isn’t tempted.

| 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.

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.

Shares in FTSE 100 housebuilding giant Persimmon (LSE: PSN) rebounded this morning. That came just a day after suffering a near-5% share price fall on concerns over the quality of its houses and speculation its contract to sell properties under the government-funded Help-to-Buy scheme will be reconsidered.

Should Foolish investors give the £7.5bn-cap a wide berth, or regard recent scrutiny as a chance to build a position in a stock that continues to trade on what at least appears to be a seriously cheap valuation? 

I’m still inclined to say the former, despite today’s clearly excellent set of full-year numbers.

Profit jump

Total revenue rose 4% to £3.74bn in 2018 while recording a 13% jump in pre-tax profit to £1.09bn. The number of legal completions also rose last year — by 2.5% to 16,449.

Factor in higher operating margins and a small increase in capital employed and those already holding will surely be breathing a sigh of relief. 

No doubt in response to recent controversy, newly-appointed CEO Dave Jenkinson was keen to say he would be “implementing a number of necessary new initiatives in customer care,” in addition to maintaining the company’s current momentum. Early reaction to the former has apparently been “encouraging.

With regard to Persimmon’s outlook, its new leader said sales were currently “in line with management expectations” and that — despite concerns over the health of the UK economy going forward — the company anticipated “delivering a similar level of legal completions during 2019 as in the prior year.”  

The elephant in the room

Trading on just nine times earnings before this morning and boasting a trailing dividend yield of over 9.7% (based on a total payout of 235p per share for 2018), Persimmon looks a tempting buy for both value and income investors.

Those who hanker for bulletproof balance sheets might also be interested. While 20% lower than at the end of the previous year, the firm still has a huge net cash position of £1.05bn in December.  

However, I remain wary. When its considered that roughly half of all the homes built by the company in 2018 were sold via the Help-to-Buy scheme, any changes could have a material impact on the company. Whether the government will be sufficiently appeased by Persimmon’s response is open to debate. 

Moreover, I still need to be convinced that the company has adjusted its pay for those at the top. This is, after all, the company that allowed its former CEO to walk away with a £75m bonus last year. Top quality management should clearly be incentivised but this award was beyond the pale, regardless of how successful Persimmon had been in recent years.    

All this before we’ve even introduced the dreaded ‘B’ word into the equation. 

Personally, I’ll be continuing to avoid any housebuilder over the next few weeks and months, regardless of whether or not Theresa May actually manages to get MPs to favour her final version of the deal.

Bottom line

Is Persimmon the biggest value trap in the FTSE 100? Perhaps not. At a time when some constituents are struggling to grow profits and just cover their payouts to shareholders, awarding this dubious accolade to the housebuilder seems extreme.

Nevertheless, I continue to believe that there are far less risky opportunities for generating income elsewhere in the market. 

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.

Paul Summers has no position in any of the shares mentioned. 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

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »