Looking for big dividends at low cost? I recently explained why I think Cineworld, which carries sub-10 P/E ratios and 7%-plus dividend yields, is a brilliant buy today. But in truth, the UK share market is packed with income heroes that appear to me grossly undervalued by investors right now.
Persimmon (LSE: PSN) is another that looks far too cheap, certainly in my opinion. The fear of plunging demand for new homes should the UK embark on a disorderly Brexit has pressured the share price of late. And recent scandals concerning the quality of its properties is having an impact upon build rates.
Completion numbers at Persimmon dropped by almost 600 year-on-year in 2019, to 15,855, as it prioritised quality over quantity. And as a consequence, revenues dropped 2.4% from 2018 levels.
The FTSE 100 firm will release details on its independent review when full-year results are unpacked on February 27. This will address recent efforts to improve the quality of its product and will influence production targets for the near term.
City analysts don’t seem to expect build rates to soar any time soon though. It’s why they expect annual earnings to flatline in 2020. Expectations of weak home price growth feed into these insipid forecasts too.
The boffins at Nationwide certainly don’t expect property prices to recover significantly in 2020. In its its latest house price report last month, the building society predicted that house prices would be “broadly flat over the next 12 months.”
It continued that it expected only modest growth in the domestic economy this year, and that “economic developments will remain the key driver of housing market trends and house prices.” It specifically cited fears over the global economy and the direction of UK trade negotiations as items that will impact conditions in 2020.
That said, house price growth has been quite terrific of late. That Nationwide report showed that property values had risen at their fastest pace in 14 months in January. And latest data from Halifax was even more impressive. This showed home values rising 4.1% on an annual basis last month.
And the bank expects “moderate” house price growth over the course of the year. It says that “demand is likely to continue to exceed the supply of properties for sale across the UK, with the subdued pace of new building also adding to upwards price pressure.” It says that “mortgage affordability should stay largely favourable” as well.
Too good to miss
Better clarity concerning Brexit has helped prices jump following last year’s general election. But there are doubts over whether this ‘Boris Bounce’ can continue as tough trade negotiations begin.
Yet I believe that the outlook for house prices in the near term and beyond remains strong, thanks to the supply and demand disparity that Halifax speaks of. It’s a theme that City analysts expect to keep driving Persimmon’s profits modestly higher. A 2% bottom-line rise is forecast for 2021. This also means that big dividends are still expected from the builder.
Yields thus clock in just shy of 8% for both 2020 and 2021. Combine this with a rock-bottom forward P/E ratio of 11.1 times and I reckon Persimmon is too cheap to miss at current prices. Given the scale of the housing crisis, it’s a share that could deliver stunning shareholder returns for many years, I feel.
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Royston Wild owns shares of Cineworld Group. 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.