I’ll admit in the past I’ve recommended home builder Persimmon (LSE: PSN) as one of the best income stocks in the FTSE 100.
Indeed, at the end of last year, I said that due to the company’s strong balance sheet, “highly profitable” business, and plans to return hundreds of millions of pounds to investors over the next few years, the stock was a better income investment than Royal Mail.
However, over the past few months my views have changed. Today, I’m going to explain why Persimmon is now on my ‘sell’ list.
Time to sell
Persimmon’s profits have boomed over the past 10 years and, only a few weeks ago, the group became the first homebuilder in the UK to earn more than £1bn in a year. For shareholders this is fantastic news, but the company’s booming profitability is starting to ruffle some feathers.
The business makes around 50% of its money from the government’s Help to Buy scheme. Last year, the group sold a total of 16,449 new homes, of which 7,970 were to people using the Help to Buy scheme. Overall, the number of dwellings Persimmon sold only increased by 406, but profits surged 13%. The average price of each home sold rose 1% year-on-year.
Persimmon has been criticised for benefitting excessively from the Help to Buy scheme, and the figures above seem to support this argument. The company is also being attacked for the poor quality of its new builds, treatment of customers, selling homes with onerous leases, and executive pay.
With all of these issues hanging over the business, some analysts are speculating the group could be stripped of its right to participate in the Help to Buy mortgage scheme, which would decimate profits.
In reality, I don’t think the government will strip Persimmon of this right — the UK needs every new house it can get right now — so I think money will continue to flow into Persimmon’s bank accounts for the time being.
Still, the company’s outlook is no longer as bright as it once was and. With this being the case, I think it might be best to avoid Persimmon and perhaps invest in one of the UK’s other leading homebuilders if you want to invest in the sector.
Trash talk
As the UK rushes to build new homes, companies and councils are struggling to expand their services to meet the demand of the new residents, including waste disposal . One company at the forefront of this sector is Biffa (LSE: BIFF).
I like Biffa as an investment because I think the company is extremely defensive. The world will always produce waste, in ever greater quantities, and its disposal will never stop being a key priority for the government.
Biffa is building a rubbish conglomerate through acquisitions. Today, it announced a deal to acquire Specialist Waste Recycling Limited for a cash consideration of £25.8m, or around 7.4 times EBITDA. This is a bit on the pricy side, but the deal does make sense overall as it will accelerate Biffa’s expansion in rapidly expanding recycling market.
Overall, analysts expect Biffa to report earnings growth of 32% for 2019, putting to stock on a forward P/E of 10.7. It also supports a dividend yield of 3.5%.
